Gold To Rise On Fiat Currency Crisis, Negative Real Interest Rates, Money Printing

A lot has been said as to what has fueled gold’s precipitous rise to all-time highs, from its characteristics as an inflation hedge to providing insurance against a deflationary recession.  While the recent, and tumultuous, correction from about $1,920 an ounce to almost $1,500, a 20% correction, shook market confidence confidence, the gold industry came together to express what will fuel the long-term bull in gold markets.

 

 Agustino Fontevecchia Forbes Staff

 

Speaking at the Argyle Executive Forum, hosted by the World Gold Council, gold investors and fund managers laid out their bull case for the yellow metal.  It rests on a series of interconnected causes stemming from the inherent weakness in developed economies.

“We’re in the middle of a gold bull market that’s been going on for ten years now,” explained Joe Foster, Van Eck’s head of actively managed gold funds, “this is not a bubble and we are nowhere near the end.”  Gold’s precipitous rise has come as a consequence of the fiat currency crisis, in which debt saddled countries have resorted to stimulative policies that involve money printing and competitive exchange rate depreciation.  This, in turn, has eroded purchasing power and fueled the rise of gold.

This argument can be made to fit practically any crisis situation.  Gold looks good in the face of mounting inflation, gold looks attractive as we approach a deflationary recession.  In reality, these gold bulls believe it doesn’t matter what’s causing the crisis, just that a crisis is coming. “Gold thrives on financial risk,” explained Foster, “the source of that risk doesn’t matter: inflation, deflation, currency crisis, debt crisis; and [current] financial stress is so acute that gold will thrive.”

And thrive it has.  After falling more than 20% to $1,500 and change an ounce, gold has rebounded strongly, rallying for at least four days straight on Wednesday to $1,721.24 an ounce, a nearly 7% gain.  Gold bulls point at the floor that formed at $1,500, were “organic demand came in,” in the words of the World Gold Council’s head of investment research, Juan Carlos Artigas.  UBS’ Edel Tully has supported Artigas’ claim, repeatedly noting the strength of physical demand the last couple of weeks.

Gold’s price action has responded, in part, to recent events.  Gold peaked after the crucial first two weeks of August, when the U.S. saw its credit rating axed by S&P and the ECB signaled it would begin purchasing Spanish and Italian bonds, a form of European QE.  Then gold tanked in late August and through September, as Fed Minutes revealed Bernanke faced a divided Fed and QE would be replaced by Twist, at least in the short term.

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