David Levenstein: Gold as a Barometer for Global Monetary System

LakeShoreTrading.co.za – As to be expected, the price of gold has fallen from its recent record highs after President Barack Obama said congressional leaders agreed on a plan to prevent a default, curbing demand for the metal as a protection of wealth. Obama announced that leaders of both parties in the U.S. House and Senate had approved an agreement to raise the nation’s debt ceiling by $2.1 trillion and cut the federal deficit by as much as $2.5 trillion over a decade. However, when you do the maths, the proposed cut in the current deficit is minimal – a mere $400 billion over 10 years!  It does nothing to address the underlying problem of excessive debt and it simply gives the US government a reprieve and thus avoid a default on its immediate and short-term financial obligations. 

Now that gold has come back from its recent highs I have no doubt that we will soon hear certain analysts shout that gold is in a bubble; just as they did when gold was $500, $700, $1000, $1200 and $1500. While it is normal for markets to correct, this market is still far from peaking and I am constantly appalled at some of the comments I hear from so called “market experts.”

In South Africa, the TV business channels continue to discuss gold with the same group of analysts who have all had one thing in common and that is that they have all been consistently wrong about gold. They remind me of the Three Stooges. Ever since gold was $250 an ounce, this “elite” group of aurophobics have denigrated investing in gold and have misinformed the viewers with some of their ridiculous statements. Less than one year ago, one of these analysts when asked about gold, would continually remark- with the same smirk on his face- how investing in gold made little sense especially when it was mainly dependent on a few housewives in India.

At the time gold was trading for less than $700 an ounce. I wonder what he will say now about those few housewives. The rest of the regular bunch would all get investing in gold mining shares confused with investing in gold bullion, and continually use disparaging remarks about gold investment. Yet, in the last two years, the price of a Krugerrand has gone up in value from R8000 per coin to around R11, 800 per coin; an increase of almost 50%!  Interestingly, another thing that all of these “experts” have in common is that they are all stock-brokers. Now suddenly some of these bright sparks are advocating allocating some funds to gold as a protection against a potential global monetary meltdown.  Where were they a year ago?

My point is very clear. Sometimes, your financial advisor, bank consultant and stock broker has little to no idea what is going on in the big wide world of global finance. As the current global monetary system continues to deteriorate, and if a solution to the all the problems facing these fiat currencies is not found soon, things are going to get a lot worse. I admit that no one can be certain of future events, but nevertheless sometimes there are clear indications of what may happen. And, in such instances one thing we can do is to prepare ourselves for what “may” happen. Investing in gold and silver is now imperative and everyone should allocate a portion of their investment funds to these precious metals.  

As I have alluded to dozens of times, the price of gold is like a barometer and reflects the condition of the global monetary system. As the reserve currencies decline in value and as the overall “health” of these fiat currencies worsens, the higher the price of gold. And, while there are a myriad of other factors influencing the price of gold, for now this is the main driving force.

When we compare the state of these currencies a year ago to now it can easily be seen that the overall global condition has deteriorated substantially. A year ago the price of the yellow metal was $1200 an ounce; today  it is above $1600. It has increased in value over the last 12 months by 33%!  A year ago, the condition with these paper currencies was not as dire as it is now. This leads me to conclude that in a years’ time, conditions are likely to be worse than what they are now. And, if I am correct then we will see a higher gold price.

While the US government has avoided a default, the problems in Europe continue unabated. Investors are worried about the debt crisis triggered by Greece is spreading to bigger nations. Moody’s Investors Service said on July 29 that it’s reviewing Spain’s Aa2 credit rating and that a cut would probably be limited to one notch. I have warned investors of an impending financial disaster in Spain, as I believe that the real problems are much more serious than what is mentioned and I do not believe a word from the Spanish Prime minister, Zapetero. But, in addition to Spain, Portugal, Ireland, Italy, Belgium could all become problematic for the Eurozone as the fail to raise enough money to pay for their debt.

The bottom line is that we are heading into a period where the seemingly endless expansion of paper money, be it debt instruments or fiat currencies, can no longer be sustained.  The price of gold is reflecting the fact that the current fiat monetary system is faltering. Gold recognizes the fact that our global debt levels pose enormous problems down the road. And as these problems accelerate, more investors will turn to gold as a safe haven.


The recent run-up in gold prices has been a very strong move that could continue higher before we see the next correction.

About the author

David Levenstein began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients. www.lakeshoretrading.co.za

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.


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