Will Gold Cleanse the World from Dirty Fiat Currencies?


"Despite a temporary boost in the dollar this month, gold and silver continue to receive support from extremely loose global monetary policies."

On Wednesday, precious metal prices climbed higher as European finance officials considered delaying parts or even all of a second bailout package for Greece. Although gold and silver prices often move inversely of the U.S. dollar, all three edged higher on the news. Despite a temporary boost in the dollar this month, gold and silver continue to receive support from extremely loose global monetary policies.

Greece’s bailout package totals €130 billion (B), but not all of the finance ministers are satisfied Greece is completely committed to the deal. Euro chairman Jean-Claude Juncker said, "I did not yet receive the required political assurances from the leaders of the Greek coalition parties on the implementation of the program." Greece needs the bailout to avoid a default on March 20, when €14.5B in debt repayments are due. The ongoing insolvency issues in Greece and other European nations have caused precious metals to be viewed more as a safe haven.

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Pau Morilla-Giner, head of equities, commodities and alternative investments at London and Capital Asset Management explained, "Below the surface. . .gold continues to trade about 60 to 70% of the time as an alternative currency, which clearly has to do with being a better store of value than nominal currencies that are being abused by excessive quantitative easing across the board."

Although the dollar has held up well in February, it benefits from being the cleanest shirt in the dirty basket of fiat currencies. In addition to a weakening euro, the dollar has risen against the Japanese yen. Earlier this week, the Bank of Japan (BoJ) surprised markets by adding 10 trillion (T) yen to its quantitative easing program, bringing the total to 65T yen. For the first time in history, the central bank also set a consumer inflation target of 1% for the time being. This came shortly after the Federal Reserve set its own inflation target. "The Federal Reserve’s decision to adopt an inflation target is clearly affecting the BoJ’s thinking. The Fed’s move has also given ruling and opposition lawmakers reason to pressure the BoJ into adopting an inflation target and easing policy further," said Seiji Adachi, senior economist at Deutsche Securities in Tokyo.

The Bank of England also announced last week that it will extend its quantitative easing program by £50B, bringing the total to £325B. Furthermore, any negative news could easily prompt additional easing efforts from the central bank. Sam Hill, an analyst at RBC explained, "If there is significant downside news over the next three months then the monetary policy committee could announce further asset purchases."

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As central banks around the world continue to engage in currency devaluation policies, gold will be relied upon to cleanse the mess left behind by central banks and fiat currencies. It will also become increasingly important for investors to research and protect themselves from misconstrued perceptions about gold and silver. In 2010, George Soros called gold the "ultimate bubble." However, gold completed its 11th year of consecutive gains in 2011. Furthermore, newly released data shows Soros increased his stake in the SPDR Gold Trust ETF to 85,450 shares in the fourth quarter of 2011. This represents an increase of 77% from the prior period, and suggests that Soros is not as bearish on gold as previously thought.

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Eric McWhinnie, Wall St. Cheat Sheet

To contact the reporter on this story: Eric McWhinnie at [email protected]

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