Gold: Surging Across Diverse Currencies! Policy Responses Should Favor Present Momentum

``When the Central Bank sells assets to the banks or the public, it lowers bank reserves, and causes pressure for credit contraction and deflation—lowering—of the money supply. We have seen, however, that governments are inherently inflationary; historically, deflationary action by the government has been negligible and fleeting. One thing is often forgotten: deflation can only take place after a previous inflation; only pseudo-receipts, not gold coins, can be retired and liquidated.” -Murray Rothbard, What has Government done to Our Money

For some, the rise in gold prices is just a normal function of markets and should be cheered about.

For us, rising gold prices, especially on a worldwide currency scale such as rising gold price in EUROS (!) see Figure 7 (and against most major currencies…except the Canadian dollar), evinces strains in the global monetary frontiers and do not represent an optimistic outlook. Therefore, we find metals and metal related assets as an instrument of hedge. (I have been saying this since 2004)

Figure 7 James Turk’s Goldmoney.com: Gold rising in Euros

As we have long argued, we believe that further strains in the financial system would lead policymakers to an almost perpetual loop for political treatment based short term solutions, whose actions includes effecting rescue packages for its constituents (banks) at the expense of the general population by debasing its currency.

Such is the natural inclinations provided for by the Fractional banking system, the functional operating system of today’s Fiat Currency Standard.

Political pressures like those applied by media--imagine the unnerving sight of snaking lines of depositors during a bank run similar to those of UK’s Northern Rock--which politician will not be prompted to act on the behest of the protecting depositor’s welfare simply because they represent significant number of votes? Otherwise be seen as insensitive and irresponsive incumbent bureaucrats.

Besides, inflationary mechanics have never been truly understood by the public, whom are mostly obsessed with short-term gratifications (the Philippine Senate hearings should be an example), which is why inflation is a favored tool by politicians and their factotums (think interest rate and currency manipulations, gold sales and etc…)…a concealed tax.

Paper money has been founded on mere trust on the government’s ability to repay its obligations. Whereas history tells us that governments in any forms unbacked by the gold standard almost always steal from its constituents by repaying debt in devalued currency, if they ever repay at all (or by default).

On the other hand, Gold is no one’s liability. In the words of the great Ludwig von Mises (highlight ours), ``The gold standard has one tremendous virtue: the quantity of the money supply, under the gold standard, is independent of the policies of governments and political parties. This is its advantage. It is a form of protection against spendthrift governments.”

The steep decline in the US dollar mirrored by the rise of gold prices simply suggests to us that there could be a countertrend or correction soon, as no trend goes in a straight line. Yet the chances of an auspicious momentum, for a sustained run perhaps until the yearend, seem to look good for our alternative money. A gold price of $800 target to $850 looks attainable GIVEN THE SUSTAINABILITY of the present conditions.

Nonetheless, we also see the US bellwethers in the Dow Jones Industrials 14,000 and S&P 500’s 1,555 as important barriers. Failure to surpass previous highs could potentially mean a retest of its August lows otherwise we could see a consolidation. However, it is quite interesting to see if the NEW DYNAMICS will be sustainable: the falling US dollar supported buoyancy in US equities or if the “anti-housing trade” should help US equities higher.

The fate of Emerging markets will similarly respond to the direction of the US dollar index. These cross currents have given us some clues as to where the long term trend is likely to proceed. We will position accordingly.

Yet given the risks scenarios, we shouldn’t discount financial shocks.

However, the odds favor that policy responses will be tilted towards ensuring the safeguards of the financial institutions and the preservation of the present monetary system, despite the mounting pressures for its unraveling in the distant future (postponing the day of reckoning).

Post-US dollar breakdown and gold breakouts…

Stay long gold, Mines and Asian Currencies!