Tuesday, January 03, 2006

Gold: Alternative Currency

This Bloomberg Story says quite a bit more about the dollar and fiat currencies than most people realize. The US dollar is currently the worlds reserve currency, but with (1) so many fiat dollars circulating the planet, (2) US debt/deficit levels skyrocketing, (3) a predicted slowdown in the US economy (can you say housing bubble) and (4) interest rate hikes coming to an end soon, people are beginning to realize that the dollar will soon start losing its purchasing power/value (Note: it could turn into a "dollar crisis" under the right circumstances). People are now looking for a better investment/return and Gold will probably be the peg of the next world reserve currency (when the dollar tanks).

Bottom line: The writing could be on the wall--for an end to the dollar's tenure as the world reserve currency.

Gold Gains Most Since 2003 on Demand for Alternative Currency

Jan. 3 (Bloomberg) -- Gold in New York gained the most since May 2003 on speculation that investors will buy bullion as an alternative to currencies because of concern about accelerating inflation.

``Gold is this storehouse of value that people want to maintain their purchasing power,'' said Ronald Goodis, retail trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. "When people start losing confidence in the dollar and the euro, they turn to gold.''

The 18 percent rally in gold last year was the fifth straight annual gain and occurred even as the dollar climbed 15 percent against the euro. The precious metal rose in all currencies, paced by a 36 percent value increase in yen and euros.

Gold futures for February delivery rose $10.50, or 2 percent, to $529.40 an ounce at 10:50 a.m. on the Comex division of the New York Mercantile Exchange. Prices rose as much as $13.30, or 2.6 percent, to $532.20. A close at that price would represent the biggest percentage gain since May 19, 2003. The metal reached a 24-year high of $544.50 on Dec. 12.

A futures contract is an obligation to sell or buy a commodity at a set price by a specific date. A rise in all commodity prices signals inflation, analysts said. Gains in gold over the past year have reflected a broader interest in commodities.

Commodity Rally
Commodity prices, led by energy and metals, reached a 25- year high in early September as pension funds, hedge funds and investors poured more money into raw materials. The Reuters- Jefferies CRB Index of 19 commodities climbed 18 percent last year, and the energy-weighted Goldman Sachs Commodity Index gained 39 percent.

Gold has become an alternative reserve currency to both the U.S. dollar and the euro for second and third-tier central banks, said Dennis Gartman, economist and editor of Suffolk, Virginia-based Gartman Letter.

Russia, South Africa and Argentina said last year they would hold more gold. Central banks, mainly in the U.S. and Europe, hold almost a fifth of the world's gold.

"This is a bull market predicated upon disdain for all currencies,'' Gartman said.

A majority of traders, investor and analysts said gold may rise this week on concern inflation will accelerate and the dollar will weaken as the Federal Reserve halts a series of interest-rate increases.

Weekly Outlook
Ten of 18 traders, investors and analysts surveyed from Sydney to Chicago on Dec. 29 and Dec. 30 advised buying gold. Four urged selling and four were neutral. Bloomberg's weekly gold survey has forecast the direction of prices accurately in 51 of 88 weeks, or 58 percent of the time.

The Fed, after raising its key interest rate 13 times since June 2004, on Dec. 13 stopped saying its monetary policy includes ``accommodation,'' suggesting the central bank is at or near a so-called neutral rate that neither spurs nor restrains growth.

``We still remain bullish in gold as interest rates will top out and the dollar will correct down,'' said Ravi Jalan of New Delhi-based Jalan Commodities.

The Fed lifted rates to 4.25 percent last month, and the European Central Bank in December raised its benchmark rate for the first time in five years to 2.25 percent, partly to head off inflation.

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