Gold and silver set to emerge as new reserve currencies

Posted on 05 October 2010 with 3 comments from readers

Competitive devaluations are the story of the hour in global financial markets. Last month’s devaluation of the US dollar, for example, almost entirely wiped out the stock market gains of the best September since 1938.

Then again gold is on a roll if you account in US dollars, not so if you are a holder of Australian dollars. China and Japan are fighting over the value of the yen. Brazil is worried by the surge in its currency.

Currency wars

This is back to the beggar my neighbour policies of the 1930s. It is a kind of pass the parcel. Devaluation is a way to boost exports and get out of a slump. But not if your trading partner then applies the same medicine.

And of course the risk is always that devaluation does not stop at the desired level but morphs into hyperinflation of commodities and sets off a nasty downward spiral. Looking at the price of agricultural commodities today and even energy and you might conclude that we are already almost there.

Holding cash in such an environment is going to quickly turn toxic. The basic problem with cash is that it is created by governments and the banking system, and as they print more and more of it money becomes worth less and less.

The simple answer then is to change your money into a currency that cannot be devalued by the central banks. For centuries gold and silver have fulfilled that role, and prudent central banks have always held large amounts of both just in case they one day needed to again use precious metals as money.

Bond crisis

If the present tussling in currency markets gives way to a more serious rolling bond crisis – and this is surely what we have seen starting in Greece, Ireland, Portugal and Spain – then there will be a sudden rush to invest in hard assets like gold and silver. That will send the price of both metals spiralling upwards as the supply of both is relatively fixed, and precious metals cannot be created as alchemists have found out.

Arabian sheikhs are apparently big buyers in the gold market these days. The Saudi Central Bank was recently revealed to have twice the gold reserves previously stated. Gold sales by global central banks have almost dried up.

Preparing for a storm that you can see coming on the horizon makes good sense. Over the next few months it is perfectly possible that the US treasury bond market will implode. That will dynamite global financial markets and send gold and silver to very much higher levels.

The only caveat is that a sudden fall in global stock markets this month might well give the bond market one last hurrah, and hold back precious metal prices for a short time. But this should be seen for the cruel deception that it will prove to be, and used as a buying opportunity.

ArabianMoney editor and publisher Peter Cooper articulated this argument at much greater length in his new book ‘Dubai Sabbatical: The Road to $5,000 Gold’ published earlier this year (click here), and regularly reviews the outlook for precious metals in the ArabianMoney investment newsletter (click here).