In 1971 the US would no longer honor its debt in gold thus giving it a license to print money and, naturally, other countries followed suit.

 

Result, easy borrowing to boost the economy followed by galloping inflation.

 

Gold went to over $800 an oz., shares, bonds stock indexes, house prices bombed as trust in paper money collapsed

 

US led interest rates up to control inflation and the $ and other western currencies settled. The renewed confidence in the old greenback led gold into the doldrums for the next 20 odd years.

 

Then in 2002 Mr Greenspan, chairman of the Fed, dropped interest rates to 1% to boost up the economy with the result that the housing bubble began, derivatives took off, stock markets went up and up.

 

China, India, Russia outshone the retail led US booming economy and demanded more and more basic commodities to fuel their home growth and at the same time gold was mirroring the surge in oil prices and rose to over $720.00 in mid 2006 before consolidating at around the $650-680 level.

 

In the last 25 years financial institutions have thrown out many of the old established lending guidelines and safety nets that they had embraced for many years as a result of heightened competitiveness amongst themselves.

 

The new breed of keen and imaginative minds, unsullied by memories of depressions and recessions, of world wars and honest politicians, have constantly come up with new and ever more imaginative and ambitious schemes for obtaining and sustaining that magic profit summit they call `alpha`.

 

The problem is that virtually without exception they all rely on easy credit, gamblers levels of leverage, the carry trade. As the amount of freshly printed money and easy lending is made available so the risk of a bigger and bigger melt down increases if history is any guide. What goes up must come down.

 

So the first question is can gold still be a safe haven as the rest of the financial markets collapse?

 

Most financial old timers will still believe that gold is still the ultimate safe hedge against a collapse of the value of paper money but they seem to be a diminishing force.

 

The problem lies in the changing influences brought about by the advent of a truly global market, the lessening of domination enjoyed by the traditional financial centers of Wall Street and London and the growing wealth and opening up of economies rich in mineral and labor resources.

 

Nevertheless the argument that higher interest rates, particularly in today’s highly leveraged environment, will lead to a significant slow down the US and other Western economies and the consequent loss of value of their currencies will sustain the upward momentum of the gold price, can still hold good.

 

Unfortunately there is another fly in the ointment that us mere man in the street investors are not privy to and that is the manipulation of the gold bullion market by the World Bank, The IMF, the Fed and other principle national banks.

 

There is an argument that there is collusion amongst them to cap the price of gold by selling reserves at strategic times, otherwise what other viable arguments are there to justify the price range of the yellow metal in the last 6 months or more.

 

Compared to the price attained at the peak of gold’s last bull run on an adjusted basis we should be looking at over $2000.00 an ounce.

 

Bearing in mind that there are billions of borrowed dollars looking for less and less opportunities to obtain the mystical `alpha` surely gold at this precarious time of increasing inflation and threat of rising interest rates must be near the forefront of possible profitable opportunity of fund managers everywhere and where the price of gold goes so does the gold mining and exploration industry.

 

If the events of the nineteen seventies are to be repeated then the fall out will be much, much greater, whatever manipulative games the world banks may be playing.

 

Are they really going to be able to control the gold market if crunch time arrives and if so what benefit for others than themselves do the worlds bankers expect to achieve?

 

Are they thinking their activities will alleviate the pain and consequences that the average investor might suffer? It would be comforting to think that this their foremost priority but ?????

 

Despite all the intangible mysteries and anecdotal comments chasing each other round and round in the rarefied atmosphere of the plethora of financial pundits, news media, self appointed gurus and politicians and other government officials utterings, (without of course any vested interests to promote!) the gold market will settle down.

 

This ‘man in the street` investor believes that no outside artificial interference in the supply and demand scenario will halt the eventual upward price of the yellow metal.

 

There may still be a period of pullbacks as nervous investors anticipate the slow down in markets generally and feel the need to take profits and release cash while they await favorable opportunities but we will be sticking with our positions as we have yet to discover the secret of impeccable timing.

 

It is only our opinion as usual but we see a movement approaching the $1000.00 mark by the year’s end and further opportunities in carefully selected gold mining companies that may be take over targets by the majors as demand continues to outstrip supply.

 

Just a couple of closing thoughts. If the Western world’s banks are selling gold then who is buying it?

 

Could it be the emerging nations, China in particular, diversifying quietly out of the dollar into gold as well as using their enormous dollar holdings to buy up other assets world wide?

 

What would happen to the dollar if the Chinese took offence to the trade sanctions against them being called for by some US politicians?

 

Particularly if some are imposed as a panic measure to gain cooperation from the Democrats in passing the funds for sustaining the Bush holy war (or even wars)!

 

Maybe they will switch to the Euro but isn’t gold the more likely candidate?

 

Good luck with your research, here’s hoping that we have given you something to think about.

 

Gold is trading at US$ 655.00 before the New York open Monday May 28th.

 

 

 

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