What's Really Driving The Gold Price?
25 March 2011
Gold attracts tremendous emotion from people and it has always done so. It manages to bring out the extremes in investors, reporters, governments. It's either hated or loved. Copper isn't, nickel isn't and coal isn't. You can call it a commodity, a barbarous relic, money or a wealth preserver. Whatever title you use, someone will react. As a metal, it has certain qualities that other metals don't have, but that's not what produces these reactions. It's not even its price rise over the last decade that causes the noise. In fact, it's not about gold at all. Governments have in turn loved it, hated it and now are beginning to love it again. It's what it's purported to represent that causes all the fuss. Just look at the reasons put forward by some as to why it's rising in price and you get the picture.
Rejection of Capitalism, or paper currencies, or the unreliability of man
Gold defeats the Technical picture
Gold has defied many sound technical analysts forecasts of late and it continues to do so rising to record levels in the dollar. It still has to rise to €1070 to beat the euro highs and if it does with the dollar falling heavily a rise to that price with the dollar at around $1.42 against the euro, you will see a dollar price of $1,519. It doesn't seem far away does it? Why should it be rising so strongly?
We heard one commentator ask if this was the rejection of capitalism. Nothing so restricted, we say. It goes far deeper than that. A look at China shows a communist for of capitalism [if there is such a thing] and they are doing very well with it, yet they are buying gold, buying silver, buying gold, buying silver….. We are looking at the entire structure on which global economies are built on to see why. Could it be a rejection of the entire monetary systems of the world? That's part of it. Is it something deeper than that, going down to the behavior of man from the individual to all powerful government? We think so. A fact that most are realizing now is, that man is incapable of leaving the underlying principles that should dominate money without interference. What goes wrong? National interests kick in. Selfish influences discolor money's value. Power that comes from controlling money becomes irresistible and distortions are inevitable, as we are seeing.
Trade Deficits exact Tributes
For instance, a perpetual trade deficit becomes a way of exacting 'tribute' from trade partners who accept newly printed money in payment. All other nations have to earn that money through trade surpluses or face a cheapening of their own money. By pricing international trade in the dollar, the business gained in U.S. banks from foreign global trade is vast. All the benefits of being the world's superpower accrue to the nation dominating the world's global reserve currency. That is until international trust is lost in that nation and another superpower rises to share and eventually take on that crown of power. In the past that position has been the subject of wars, but in today's world the battleground is economic and financial.
Means of Exchange as Governments melt
Man will always need and use a means of exchange even if it descends to barter, but history has shown that the only money that has proved enduring is one free from individual national influence in this world. Gold and silver have carried that mantle and always will. The experiment with manmade money could only last as long as man's determination to provide a money that moved from simply a means of exchange to a measure of value. Man's inherent nature ensures that. We are now at the point where manmade money is losing its value and most men can see this and don't like it. They feel betrayed at the most basic of levels and by their own governments.
Remarkably, in the first 100 days of 2011, we have seen the effectiveness of government melting. We are not just referring to those in the Middle East, but to the collapse or emasculation of governments in the developed world. The U.S. and the U.K. have governments that are now only capable of functioning well when issues agreed by both sides come to the fore. Citizens are appalled when they see their leaders unable to agree on critical matters such as reining in excessive spending and debt growth.
As to the sight of money creation through quantitative easing for the benefit of boosting economic growth one is made tense in the knowledge that this is a process that undermines confidence in and the value of money, in savings, investments and trade. If such devaluations were fully realized then the flight to gold and silver and out of manmade money would rise to a stampede.
The Function of Money
In the past money was an item whose principal role was to measure value. Its secondary role was to function as a means of exchange. By using a desirable commodity to act as money it was made to be attractive to all men wherever they were on this planet. By using an item of limited availability, the ability of man to expand it beyond its accepted value was curtailed. Buy using an internationally recognized and accepted item of high value men, wherever they were, would use it. The moment one nation could dominate money and its international acceptability, the only way if could be used effectively was if that nation dominated all nations. Rome was a case in point. The U.K. morphing into the U.S. rule ensured that first the pound sterling and then the dollar ruled global money.
In moving from gold to manmade money, dependence on the behavior of government became total. The only link to the ongoing credibility was to the oil price which created an ongoing international demand for the dollar. Break that and the entire credibility of the dollar rests on trust in the U.S. monetary system, so far, hardly an inspiring performance.
The last forty years has been an incredible experiment with manmade money made possible only by lulling mankind into acceptance through economic growth. Take that growth away and its path to rejection will be a short one. Since 2007 we have started down that road.
Understanding the fall of Manmade Money and the rise of Gold and Silver
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