Gold as Currency

January 23, 2009 Gold Stocks, Inflation, Market Updates No Comments

We are beginning to see gold as currency. During this global financial meltdown, gold as currency should become the dominant trend as Central Banks flood the world with liquidity.

The Dow is currently down 164 at 7,958 (that 8,000 mark seems harder and harder to maintain), the NAS down 12 at 1,453 and gold is up $27 at $883.40. Let’s move on and examine this latest move in gold.

Gold futures moved upwards to a three week high based on falling equities and the growing realization that the global economic outlook would not soon improve. Gold for February delivery rose $21.10 (2.5%) to $879.90 in electronic trading.

Adding to the gloom and doom was the government data out of Great Britain showing that their economy had contracted at the fastest quarterly rate in 29 years. The pound fell to a 23-year low versus the dollar as it is becoming clearer that the economy is mired in a deep recession that looks to be getting deeper as the days go by.

Acting as Currency?

The hits just keep on coming as one economy after another accelerates down the road of recession. The size and scope of this financial debacle is nearly incomprehensible and it is clear that none of the central banks knows how to contain the problem. As more and more bad news comes out, the negativity begins to feed off itself, creating a life of it’s own, which drags things down even further. In the midst of all this, gold has quietly moved well above its 200-day moving average against both the euro and the dollar. It is still down about 11% versus the yen, but moving in the right direction.

Capitalism On Its Last Legs?

I came upon this illuminating excerpt from Darryl Robert Schoon’s article written yesterday January 22.

THE LAST STAGE OF CAPITALISM AND PONZI FINANCE

Like Ponzi schemes, capitalist economies must constantly expand or they will collapse. This is because capitalism is a system wherein credit-based money has been substituted for real money, i.e. savings-based money such as gold and silver; and credit-based money soon turns into compounding debt.

The end of such systems has always been bankruptcy. When credit-based economies contract, governments, businesses and families are no longer able to pay the principal and compounding interest on their debt and economic collapse results.

The current system began when the Bank of England, England’s central bank, started issuing credit-based paper banknotes in place of gold and silver in 1694. This system was transferred by private bankers to America in 1913 in the form of the Federal Reserve Bank, the US central bank equivalent of the Bank of England.

The credit-based central bank system then spread after WWII to the rest of the world. As the credit-based system spread, so too did the resultant compounding debt and now, the day of reckoning for everyone has arrived.

The facts are the facts, and nothing can change them no matter how hard the progressives try. We must learn to approach our investing with that concept firmly in mind. Because we believe something to be true, does not necessarily make it so. The more research and facts that we bring to bear before a decision is made, the better the result will be. I think that most Americans are living in the past when they think that the dollar is a good place to go to preserve wealth. Because that’s the way it has always been, does not mean that’s the way it will always be. These numbers from the US Federal Reserve clearly show the path the US dollar is on.

M-1, NARROW MONEY AGGREGATES 13 WEEK RATE-OF-CHANGE.

Week ending June 9, 2008 + 0.1 %
Week ending July 28, 2008 + 2.9 %
Week ending Aug 25, 2008 + 6.2 %
Week ending Sept 29, 2008 + 8.8 %
Week ending Oct 27, 2008 +14.8 %
Week ending Nov 24, 2008 +22.6 %
Week ending Dec 29, 2008 +32.2 %

The numbers show why gold is beginning to act like a currency. The Federal Reserve’s policy of “quantitative easing” is accelerating and it will bring the dollar down with it. Gold “senses” this and is reacting accordingly. For the third day, gold is up even though the dollar is up (as of this moment the USD Index is up .97% at 86.85). The dollar’s rise is based on a simple reaction to the other currencies which are in worse shape. So the dollar is “best” of the imploding global currencies. Gold on the other hand is starting to behave as the currency of last resort.

Let me close with a word of caution. I am a gold bug and just because I want gold to rise does not make it happen. I am well aware that the central banks will fight with everything that they have at their disposal to keep the fiat currencies alive. History dictates that they will fail, but it does not give us the exact time line. We must be prepared for a huge battle at each resistance point along the way. $890 is the next resistance point. Let’s see how gold fares as it approaches the $890 mark.

With that word of caution mentioned, I feel that gold stock purchases made in the last 3 months have little to no down side risk unless you are buying them as day trades. I won’t be selling any of my gold stocks in the immediate future. Accumulation should be the goal on any pullbacks in the price of gold.

Till next time, good luck and good trading!