Signs are Pointing to Gold Posted by Adam King on September 19, 2012
September 19, 2012 – With a third round of quantitative easing ready to flow through the financial system, the fundamental dynamics of the American economy are being questioned, perhaps more than ever. The utilization of tactics like easing arouse criticism that the U.S. Federal Reserve lacks fiscal discipline and chooses to pursue monetary policies that are relatively easy.
The quantitative easing had an immediate and impressive effect on the gold market, boosting both gold and gold stocks as investors sought protection from the effects of QE in precious metals as a store of real value. There is a correlation between the monetary base in the United States and the value of gold. As the money supply has increased since 1984, so has the price of gold.
The dollar, as usual, took a real hit from the easing. Generally, increasing the money supply causes devaluation in currencies. This is the primary problem Richard Nixon intended to avoid when he ended the gold standard in 1971, announcing that the country would no longer redeem its currency in gold.
A dollar in 1971 is worth only 17 cents today, more than 40 years later. The decline should strengthen the case for gold as a store of value when we’re seeing massive amounts of liquidity being artificially pumped into the system. It is only the government, as Milton Friedman once said, that can take perfectly good paper, cover it with perfectly good ink and make the combination worthless.
Deutsche Bank has illustrated in long-term asset return research, which charts economic history in comparison to current markets, that there are multiple ways the world has changed dramatically after 1971, in relation to history before. The research firm believes a return to the gold standard would be disastrous, but also finds the lethal cocktail of unparalleled levels of global debt and unparalleled global money printing are new governmental developments that have the potential to be just as threatening.
The question remains whether we should believe that developed countries currently have the ability to withstand austerity and cutbacks after 40 years of being on a free-floating currency. The case for gold is very strong with gold bulls buying now. Credit Suisse saw massive inflows into gold exchange-traded products in August after significant outflows compared to crude oil and the broader market in the previous four months. As far as fiscal policy is concerned, world banking leaders like Bernanke and Draghi only help make the case for gold.