Gold: Three Reasons why the Price Will Go Higher
By Staff News & Analysis - October 09, 2009

We continue to see much more upside than downside risk to bullion for three main reasons: 1. The economic case for owning gold remains strong. Notwithstanding the growing chorus of bullish sentiment, debate remains strong as to how "real" this perceived recovery is. With the fear of a significant financial crisis seemingly waning, debate is now turning again to how the recovery will play out. In almost all but a global soft-landing scenario, gold is likely to rally further. With a global recovery unlikely to be smooth, the two main risks to most asset values are inflation and US dollar weakness- both of which are decisively gold positive. 2. Seasonal factors will act as a booster. Gold is also set to receive a boost in reaction to seasonal demand factors, particularly Indian demand, over the next three months. 3. Safe haven buying will continue to reinforce the gold price. Further reinforcing our positive outlook for gold is continued safe-haven buying as an alternative currency, with gold the only currency whose production is going down, not up. There is also little chance of a supply response to high gold prices. Mine production is on a declining trend.- Telegraph/ Daniel Sacks is Co-Portfolio Manager of the Investec Global Gold Fund

Dominant Social Theme: Time for safe havens?

Free-Market Analysis: The above analysis focusing on gold and silver is fine as far as it goes. But from our point of view, it lacks a certain level of passion and conviction. Thus, with all due modesty we offer own version of the above prediction, as follows …

Yes, Dorothy, gold may go higher and even considerably higher! Gold has been trending upward since 2001 and silver, too. We are on record as stating our belief this trend shall not die out until at least 2015. Of course, maybe the world will have reconfigured some sort of money metals standard by then, so the dominance of gold and silver may extend even further.

But let's back up a bit. John Maynard Keynes, a socialist economist popular with government types once more, never really postulated compelling reasons why economies go up and down. From Keynes' point of view, consumers seemingly ceased to buy enough to stimulate the economy and needed a government push to start buying again.

Within this Keynesian context, then, there are no reasons for economic cycles. But obviously there are economic cycles and free-market analysis provides compelling reasons for why they happen and how they work.

Free-market economics starts with the idea that economies left untouched by government interference would have ups and downs but the economic cycle would be regional and relatively subdued. It is only the savage and endless printing of money by central banks that turns the ordinary economic cycle into one of coordinated euphoric highs and ruinous lows.

We are in one of those low periods now after one of the highest highs. This cycle is especially bad because it is a kind of super cycle in which the remnants of previous cycles are being worked out. The last time this kind of low developed was in the 1970s when the excesses of the 1950s and 1960s blew off. In the late 2000s, the excesses of the 1980s, 1990s and 2000s are being worked out, our opinion.

These cycles have a life of their own. Government, we note, has recently re-stimulated securities markets by printing trillions of paper dollars, but it is these distortive dollars that got us into this mess in the first place. In the larger blow-offs such as this one, government stimulus has a way of backfiring. Central banks can print money but they have no way of timing when to remove it. In this case we have had a historical episode of money printing, one that will go down in the annals of fiat money and be cited we believe as a cautionary tale of what not to do when faced with economic hard times.

In any event, the result of such money printing will inevitably be either high inflation, a deep economic trough (depression) or both. Within these competing alternatives money metals will continue to make progress – not as safe havens, or because they offer a flight to quality. From out point of view, during the natural disasters caused by fiat money, people willy nilly are fleeing back to REAL ‘HONEST' MONEY.

The tug of war as we see it is between gold and silver-honest money – and fiat money. People are content to utilize fiat money when it is on the upswing and when it is fueling a large boom. But when disaster strikes as it inevitably does, a larger and larger group of investors turn back to gold and silver as value placeholders. These are not INVESTMENTS per se, in our opinion but are holdings of money metals in lieu of fiat.

Ask someone who has bought gold or silver recently and the chances are they will not speak of "investing" but of retaining the value of their ASSETS. They are not necessarily worried about whether gold or silver will appreciate – anymore than they are concerned about whether the dollar, yen or yuan will appreciate when they hold assets in these currencies.

No, they are worried about retaining what they have and have chosen a money alternative to do so. This is why gold and silver go up during fiat money troughs. Despite all the talk about "barbarous relics" gold and silver are a viable, living alternative to fiat money – and provide a vibrant alternative every bit as powerful as fiat during times when fiat illustrates its more destructive characteristics.

Always we read analyses by clever investment gurus – even well meaning (hard money) ones – speaking about gold and silver as save havens and inflation hedges. From our point of view, during the place of the cycle in which we are now, gold and silver are operating as an alternative MONEY MEDIUM. In fact, of course, gold and silver are REAL money, but fiat does have attractive characteristics during the height of a euphoric boom, which is why the monetary elite continues to get away with its issuance.

After Thoughts

In any event, gold and silver are money, and during this turn of the cycle, it is such HONEST MONEY that is predominant. People will continue to support this trend until the cycle turns and the monetary elite are able to kick start fiat once more. Of course we are on record as stating that this time round reinvigorating fiat money may prove to be nearly impossible over the long term. That basically would leave the field wide open for real money – gold and silver. The prices of both should continue to rise as more and more people seek these money metals as an alternative to failed fiat currencies. Make no mistake, the money is not "fleeing" to safe havens and alternative investments. Nor is gold and silver "going up." Alternatively, it's the public's confidence in fiat currencies that is "going down." We see it more as a home-coming.

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