Money week magazine

By Ed Bugos for Whiskey and Gunpowder:

I turned bullish on gold in the late ’90s, in my former post as a stockbroker.

The collapse of the “strong dollar policy” of that period formed one of the major premises of my case for gold at the time. However, by early 2005, as the currency reached my original target and began bouncing off its long-term lows, I recommended that clients no longer bet against the dollar, because I felt that the dollar would level off. Still, I wrote, gold prices were going to make their biggest move yet. As subsequent events proved, I had that one right.

Now, the gold story is this: The value of money is in danger of dropping precipitously again, and it is increasingly likely that the world monetary system will have another brush with hyperinflation akin to what occurred in the 1970s, except this time, worse.

The evidence supporting this thesis is devastating, yet this story is scarcely factored into gold values, let alone financial markets. That is, we have seen a rush to gold when the foreign exchange value of the U.S. dollar has crumbled, whenever some geopolitical boiling point has been reached, when other commodities have left the station, because the Chinese and Indian economies were heating up, and so on. But there has yet to be a significant enough deterioration of confidence in central banking institutions, or the quasi-fiat money they produce, to herald the kind of buying in which a person is “anxious to swap his money against ‘real’ goods, no matter whether he needs them or not, no matter how much money he has to pay for them,” according to Ludwig von Mises.

The evidence suggests we are headed there, but it also suggests that the most spectacular part of the bull market in gold must still lie ahead of us.

But the most interesting part about these “spectacular” moves in gold, where the market’s spotlight focuses entirely on the gold story (the greatest story never told), is the behavior of the currency markets.

Stable dollar

The biggest moves in the gold price occur when the foreign exchange value of the U.S. dollar is stable.