Is Gold the New Currency?

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". . .only a breach below US$887-$888 will cast serious doubt on the current bull run."

Gold gets more than its share of attention when prices are rising. This is particularly true when key technical levels are in sight or being breached, as well as psychological barriers like US$1,000 per ounce that was broken recently. But with spot gold now heading toward US$900, the latest decline warrants some analysis, too.

Each of the past two declines in November and January were limited to 10% before the uptrend resumed, according to Ashraf Laidi, chief market strategist at CMC Markets in London. He noted that since November, gold did not fall below its 50-day moving average.

Meanwhile, Mr. Laidi told clients that the latest retreat remains within the upward trend, suggesting support is holding at US$890. He added that only a breach below US$887-$888 will cast serious doubt on the current bull run.

"If there's one singular reason gold is unlikely to repeat the October selloff is that today central banks are either at or on their way to quantitative easing (Fed, BoE, BoJ & BoC), followed closely by the SNB," the strategist said.

A number of factors have contributed to gold's decline in the past week or so. The market has had to absorb a large amount of old scrap as record high prices in local currencies around the world—along with falling income and rising unemployment—has prompted many people to cash in their old gold jewelry.

Since China's trillion dollar cash hoard is largely made up of U.S. Treasuries, John Ing, CEO of Maison Placements Canada, suggested it could protect its reserve position by buying gold with some of its U.S. dollars.

"Gold is denominated in dollars and such purchases would protect China against a declining dollar," he said.

Mr. Ing also thinks President Obama will be good for gold but bad for the greenback as he "inflates the costs of debt away."

"We continue to believe gold is the antidote to our problems," he said in a recent report. "Gold will continue to rise in value as long as the United States keeps printing more money than the economy can use."

Calling gold the new currency and predicting prices will hit US$2000 in 2009, Mr. Ing suggested that with the U.S. holding 261 million ounces of gold, the Federal Reserve could issue gold-backed debentures as a means to create liquidity and trust in its troubled financial system.

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