The Train Has Left The Station And It Is Full Of Gold

In a sense it really no longer matters what the politicians in Washington decide to do with our debt problem. That issue has become a secondary determinant, along with the European debt problem and the Chinese inflation/hard landing story, of the price movement in gold over the long term. All these issues remain important factors in short term fluctuation in the price of gold. An agreement on the U.S. debt and debt ceiling issue will definitely cause gold to go down. The European deal to create a super fund to rescue failing EU members was responsible for a drop in gold prices last week. But given the few details about this agreement and what appears to be a lack of private participation in debt forgiveness is really not very encouraging with respect to finding "the" solution for the European debt issues.

But all these problems mentioned above have no baring, longer- term, on gold prices. In other words assuming all three issues are resolved gold prices will remain on the rise for the next few years. The IMF's latest figures show that the percentage of central banks reserves around the world that is held in dollars has been on the decline reaching 60.7% by the first quarter of this year compared to 71% in 2001*. Central banks bought more gold in 2010 than in previous years. The single most important determinant of gold prices in the long term now is the process of finding an alternate reserve currency, and while this process may have been set in motion a while ago it certainly has gotten a huge boost from the kind of behavior that we have seen coming out of Washington that sends tremors through the international economic system and shakes the confidence in our ability to provide a politically stable environment. The reason is simple: uncertainty. Uncertainty as to what will replace the dollar. This will be a long process as the world goes through a "figuring it out" period likely to last years. While the replacement may not be gold (even though it is likely to be) there is nothing that boosts the price of gold like a world full of economic problems in search of a reserve currency. The train has indeed left the station and it is only a matter of when it will reach its destination. The smart ones will be ready to help unload the content (or should I say the profit?). All aboard??!!

* From an article by Matthew Lynn, MarketWatch on 7/7/11

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