Gold the Investment for 2009 Amidst Global Economic Crisis and Competitive Currency Devaluations

By: Mark_OByrne

Gold rose 2% last week (and silver 6%) for the third week of rising prices. Continuing safe haven demand for gold seems to be driving the market as gold has rallied again at the start of this week with the dollar only slightly lower and oil prices only slightly higher.

With the Christmas season upon us and trading volumes set to fall, markets may remain directionless and range bound until early in the New Year. Although the Christmas season and last few days of December has seen some nice gains in the gold market in recent years.

Even the most optimistic commentators are realizing that the financial and economic crisis looks set to deepen in the first few months of 2009 which should see a continuation of the weakness in stock markets and gold remaining firm, as seen in recent months.

Unprecedented zero interest policies, massive fiscal stimulus packages, massive money printing and competitive currency devaluations on an international scale will see gold again become the go to investment in 2009

Ben Bernanke is like a central bank Santa riding on his monetary sleigh showering the US financial system and economy with billions of dollars in an increasingly desperate effort to prevent a deflationary economic crash. While we all hope he is successful, economic and monetary history is not on his side and the extent of the money creation is likely to lead to significant stagflation and hyperinflation in the coming years.

Gold looks set to finish the year higher (up 4.57% - see table) which will be a very impressive given the carnage seen in the deflationary meltdown seen in investment markets in the second half of 2008.

Global Economic Crisis and Competitive Currency Devaluations to See Gold Remain Go To Investment in 2009

The sharp decline seen in the dollar in the last month ( US Dollar Index was down 2.43% last week and 10% in less than a month despite a sharp retracement towards the end of the week) is leading to concerns of a disorderly run on the dollar as the creditors of the world’s largest debtor nation get worried about their US dollar denominated assets and need their own currency reserves to help protect and stimulate their own struggling economies.

A prime distinction between the 1930’s deflation and Great Depression was that the US was the world’s largest creditor nation and the dollar was backed by gold. Thus the US dollar strengthened in value as everything deflated in value versus it. Gold was even stronger as Roosevelt devalued the dollar by 60% and revalued gold by 60% from $22/oz to $35/oz in 1933.

Today, the US is the largest debtor nation the world has ever seen and the levels of debt are increasing dramatically. And the US dollar is now a fiat paper currency, only backed by the “good faith and credit” of the US government.

It would not require significant selling by the Chinese, Japanese, Russian or OPEC nations to create a run on the dollar and sharp move upwards in long term interest rates (as US government bonds are sold) rather only a sharp reduction in their purchases of US debt instruments. This possibility is looking more probable and could see President elect Obama facing a monetary crisis in his first term.

Especially as the economic meltdown is leading to the US’ creditor nations having their own domestic financial and economic crisis to deal with. A sharp decline in the dollar will likely see other nations devaluing their currencies in competitive currency devaluations which would see the value of all currencies decline relative to gold. Competitive currency devaluations are already taking place in many countries internationally including in Japan (just last week Japanese Finance Minister Shoichi Nakagawa signaled Japan is ready to sell yen in order to artificially manipulate a weaker currency), Russia and China.

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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