Update: Gold & Silver, Dollars & Euros

“The current talk in the mainstream financial media about gold being a bubble at $1,600 an ounce and of silver having already reached its top of its long-term peak at $50 an ounce is simply rubbish.

“A bubble is never defined by high prices, the perception of high prices or even a decade long rise in prices. What defines a bubble is a meteoric rise in price that is not supported by fundamental reasons.

“The fundamental reasons that have driven gold from $250 to $1,600 and silver from $4 to its current $39 – $40 range are even stronger today than they were at the beginning of this precious metals bull.

“Therefore, it is impossible for a bubble in gold and silver to exist at their current prices and at this current time.

“And for this reason, this is precisely why the global nuclear arms race has been replaced by a global physical gold race. Welcome to the new global war in precious metals.”

JS Kim – Original Source

It was not gold itself, but the Gold Standard, which Keynes described as a “barbarous relic”. The Gold Standard went through many formats over the decades, but essentially it required US dollars to be redeemable for a “permanent” fixed amount of gold. It was unworkable: everyone tried unsuccessfully to resist the tension caused by keeping the gold price fixed while the number of dollars increased unchecked, especially during the Vietnam War. In 1968, the French central bank forced the issue by demanding US gold for their petro-dollars, and America refused. A couple of years later, Nixon formally severed the link between the dollar and gold.

World Bank President Robert Zoellick said in December 2010 that the world should change its relationship with money so that gold becomes the reference for value. In future, a fixed gold price would not work as this reference for valuing currency and credit in a new system. A floating price would, but it would have to be much higher than today’s price to represent enough value to support these new currencies, in whatever form they take. Some call this concept “Freegold”.

The current dollar system is falling apart, right in front of our eyes, right now. Although it is impossible to be accurate about the timing of how this crisis will unfold, my personal view is that the following key events are now inevitable:

• The ruling American powers will increasingly allow the United States to be seen as a country which will default on its debt – even by the Federal Reserve Bank. However, this is manipulation of public perception; they have no intention of explicitly defaulting, as this would end their game. They will raise the debt ceiling and continue to debase the dollar, so that their unpayable dollar-denominated debt becomes increasingly worthless.
• Because of this debasement, the US dollar will soon lose its status as the world’s reserve currency (this is happening already, as central banks are slowing down or ceasing their accumulation of new dollar-denominated assets).
• Non-US owners of US dollar-based assets will want to exchange them for anything else which keeps its value more reliably.
• There are more dollars outside the US than there are inside it. When these foreign dollars start to come home, the value of the dollar in the USA will plummet and the rate at which dollars change hands will accelerate. This is called hyperinflation.
• Sovereign debt in the Southern European states will collapse and these countries will revert to their old currencies, devalued by up to 30%. The “Nordic” Euro as a currency will survive without them, for two reasons: firstly, it is not a national currency and secondly, it is supported at the European Central Bank by substantial gold exchange reserves: over 550 tonnes of gold bullion, plus other gold receivables, which the ECB revalues every 3 months using the actual market price of gold (gold and receivables valued at over €363bn on 30th June 2011). The Euro was deliberately designed from the outset to withstand the stresses that will destroy unbacked national currencies like the US dollar.
• All non-US central banks have been steadily and quietly buying gold for at least a year, some for much longer.
• There will come a crisis point, which will be seen in retrospect as the “Great Reset”. The dollar, and many other national currencies, will be abandoned. At this point, gold will be artificially and collectively revalued upwards ONCE so that its new value is sufficient to back the new currencies. This gold revaluation will be very substantial, of the order of 5-10 times or more of its current value, and will be permanent.

Between now and the Great Reset, the price of silver will often rise faster than that of gold and will also be more volatile, as increasing numbers of people realise their national currency is an unsafe long-term store of value and will buy various precious metals instead. However, since central banks and very wealthy individuals hold gold in great quantity, but not silver, silver will not be used as the basis for a new money system, and will not be artificially revalued as gold eventually will.

So we might expect:

• Prior to the Great Reset, silver to often outperform gold as an investment.
• A single, huge and permanent increase in the value of gold.
• A high, floating price for gold thereafter.

For these reasons, I would recommend you move anything you consider to be investment money into vaulted gold bullion. At times when silver looks set to rise faster than gold, sell maybe 30-70% of your gold (depending on how adventurous you feel) and buy silver bullion. When silver peaks, sell the silver and buy gold again. In this way, you will end up with more gold than your cash alone would have bought. You can do this very easily at BullionVault.

Holding a growing quantity of vaulted gold bullion indefinitely will give you great financial protection and flexibility. At any time, part of your bullion can be turned back into cash for immediate use; inflation will have no damaging effect on your store of value because gold prices are rising faster than inflation, and in the longer term a global gold price revaluation will give you an almost unimaginable return on your investment.