Gold Revaluation—Clutching at Golden Straws


"Some gold analysts are coming up with theoretical moves, which could have a huge impact on the gold price; but will the suggested scenarios ever happen?"

Gold analysis and theorizing is a hazardous exercise, as the metal's price seldom follows what would appear to be the logical path to new heights. On the occasions it does surge dramatically, and then tends to come crashing down again. This is not to say that gold is not a good investment, as has been shown by its overall performance against markets in over the past year, or that it will not regain its upward trajectory before too long; but some of the admittedly well thought out theories of gold proponents, which would lead to a huge gold price increase, are, in our view, still unlikely to happen.

Notable amongst these theories are two, very logical moves that would increase the gold price dramatically; but will they ever happen?

The first of these 'solutions' is that China starts buying substantial amounts of gold in place of U.S. dollars for its huge currency reserve surplus. Long-term dollar parities would likely to fall against most other currencies, and China could protect its reserve position.

The second is that the U.S. Treasury and world Central Banks will impose a huge revaluation of gold vís a vís the dollar as a contributory element in easing the world's economic ills.

With President elect Obama a keen student of Roosevelt's policies, he may well consider the same kind of dramatic move. This would put huge amounts of cash into the U.S. economy at the expense of printing more money, and huge amounts of gold into the U.S. treasury, which, should help prevent further dollar destabilization despite the potentially inflationary impact of the enormous money supply increase.

For this to have an effect globally would require other governments and their Central Banks to do something similar—the revaluation part of which would likely be approved of by those who have long berated a Central Banks' conspiracy in manipulating the price gold downward. But a 'conspiracy' to manipulate the price upwards is, of course, another matter.

One might consider these ideas as 'clutching at straws' by the gold bull theorists, however economically neat the latter solution may be in curing the world's financial ills. Given the recent unprecedented, and seemingly unsuccessful, moves by governments worldwide to kick start economies again, one cannot rule out such a dramatic move by an Obama administration looking for another financial experiment to stimulate the economy.

For the medium term, the continuing global financial meltdown will likely see a rise in gold price over the next half year, and possibly beyond. Global gold output is still falling—a trend that is likely to continue. And with the gold majors expressing confidence in the metal price, some de-hedging will likely continue, though the requirements of financial institutions to protect themselves on new project risk may see some forced hedging to mitigate the overall de-hedging position.

Most of these factors are positive for gold, but as always its price progress remains unpredictable and may well be as dependent on the strength of the dollar as ever. And the dollar has defied logic by rising despite the U.S. economy's travails. Whether this will continue or reverse may be the ultimate bellwether for the gold price.

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