What is the soaring price of gold and silver telling us?

BY the time you read this, the price of gold and silver may have fallen back a little, or by a lot. Or maybe it will have kept going up.

BY the time you read this, the price of gold and silver may have fallen back a little, or by a lot. Or maybe it will have kept going up.

Money Express by Jill Kerby in association with Aviva

Precious metals seem to have a mind and momentum of their own at the moment, but their price is simply reacting to the growing awareness all over the world that the ‘great correction’ continues: during the boom years too many governments – and banks - made too many promises they couldn’t keep. Too many ordinary people bought too much property and other stuff with too much credit that they cannot repay.

In Ireland, we know how it turns out when you have no choice but to own up to your – collective - borrowing and spending mistakes – your economy keels over and your state goes bust.

The people who are driving up the price of gold and silver these last few weeks are now worried that it isn’t just the Greeks, Irish and Portuguese who are bust, but maybe…sharp intake of breath …maybe the Americans too, whose budget deficit is $1.7 trillion and the national debt, $14.2 trillion. The US economy is in danger of a having a stroke.

The ratings agency S&P may not have much credibility left after the way they kept rating toxic, subprime mortgage bonds as a triple AAA risk during the boom years. But last week’s warning that the USA might not continue to deserve its top rating (which of course it does not) if it doesn’t get it’s hyperbolic national debt under control, still came as a shock.

‘The Emperor has no clothes’ is what the rating agency was actually saying. And once that observation spreads, you have to wonder if the game is up and the 40 year experiment of an entirely fiat global currency system is also coming to an end.

The Chinese, who hold trillions of dollars and Treasury bonds in their reserves, responded by also expressing concern about US debt and deficits. Aware of the threat that rising price inflation the government has recommended that Chinese people start buying gold with their savings. Purchases have quadrupled on last year’s volumes.

And in a most significant US move, one that many observers believe also had an impact on the latest price spike, the $19.9 billion dollar University of Texas Investment Management Fund – the second largest endowment fund after Harvards’ – has spent nearly a billion paper dollars to buy 6,643 bars of 24 carat gold bars. Not much of a vote of confidence is the greenback.

When the price of gold hits $1,505.34 an ounce (or €1,032.74) and silver, $46.16 an ounce (or €31.66) as it did when I wrote this article, you can be certain that investors will take profits and the prices will fall back. (Summer is often the ‘low’ price season.) Since silver has an industrial utility it has a tendency for bigger peaks and falls. Some people will look forward to those dips as a buying opportunity.

I have been writing about gold’s steady climb in this column for the last seven years. It cost about $550 dollars an ounce back then. Silver, about $7. The physical metals haven’t changed at all since then, except perhaps that with each year they become a little bit more rare and costly to extract. What has changed, is the amount of additional dollar bills (and pound notes, euro, yen, yuan, etc) that central banks have printed out of thin air. It isn’t so much that the lumps of gold have become more valuable…but rather that the world’s paper money has become increasingly worthless.

Gold has always been considered a store of value and until the First World War was even an acceptable method of exchange. Until 1933 in the United States, every 20 dollar bill could be exchanged for an ounce of pure gold. After the Second World War, only countries could exchange their dollars for gold. After August 1971, the United States, already spending more than it was earning, went off the modified gold standard entirely and substituted the US dollar as the world’s reserve currency.

Since then, politicians – everywhere – have been spending beyond all their people’s means because they were no longer obliged to limit their spending and the volume of currency they issued against their reserves of gold and silver.

So vast is national debt, that governments can only issue more debt and print more paper currency. It is why global retail price inflation is such a risk.

Gold is not cheap anymore, not like it was back in 2005. But nor is it in a bubble.

How many family members or friends do you know who have bought gold or silver coins or bullion? (Or exchanged their euro for Perth Mint certificates – gold held in Australia, see Goldcore.com).

The price will go up and down. But when everyone is buying gold (and not selling their scrap gold!) and every other story in the media is about gold and every dinner party is chatting about it – just like we did about property during the boom – that’s when gold will be in a bubble.

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