Gold rose to a new record as it reached $1,260/oz last week. The previous all-time high for the yellow metal was $1,252/oz set June 8. The new record is significant because it shows that investors are beginning to understand that just because governments around the world claim that things are improving, this is nothing more than meaningless rhetoric. However, there is a politician out there that seems seriously concerned about the explosion of government debt, and in his first address to parliament on June 11, Japan’s new prime minister Naoto Kan warned that his country could face a financial disaster similar to Greece if it did not deal with it’s bulging  national debt. “It is difficult to sustain a policy that relies too heavily on issuing debt. As we have seen with the financial confusion in the European community stemming from Greece, our finances could collapse if trust in national bonds is lost and growing debt is left alone,” he said.

As the issue of sovereign debt and government deficits cannot be resolved immediately, we can expect gold to move higher while governments continue to debase the value of their currencies by printing more fiat money. Recently, we have seen gold make new historic highs in US dollars as well as euro, sterling, Japanese Yen, Swiss Franc, Russian Rubble, Indian Rupee, Mexican peso and Chinese Yuan.

In most cases, a fiat monetary system comes into existence as a result of excessive government (public) debt. The last time this happened in the US was in the 70’s when Nixon abolished the gold standard, and thereby removing any intrinsic value to the US dollar. And, in 1973 the IMF officially abolished gold as part of the monetary system.  One of the problems of having a currency backed by gold is that this system restricts monetary expansion and as a consequence restricts economic growth. But, at the same time, the only thing that gives a fiat currency its value is its relative scarcity and the faith placed in it by the people who use it. And, unfortunately the history of fiat currencies has been one of failure. In fact, every fiat currency since the Romans first began the practice in the first century has ended in devaluation and eventual collapse, of not only the currency, but of the economy of the country that introduced the fiat money.

If we look at the dilemma governments are currently experiencing, in particular massive national debt, low economic growth and high unemployment, these issues are precisely the issues that can cause a fiat currency to falter and eventually collapse. So, while governments and central banks try to avoid such a scenario, owning gold should be a cornerstone investment in everyone’s portfolio. Unlike paper money, it is tangible, indestructible, and it is the only financial asset that isn’t someone else’s liability. Furthermore it is extremely liquid and, unlike property, it is also portable and can be converted into cash practically anywhere in the world.

In a recent interview, Marc Farber said, “I buy gold, I don’t know what else to buy.” Faber expects another worse crisis to happen in five to ten years, “when the whole financial system collapses” – the reason: the debt problem has been kicked down the road without actually being solved. “I think US Fed, ECB and other central banks have no other option, they will continue to monetize and buy bad paper, period. The central bankers are precisely the ones that don’t know that excessive money creation and excessive debt creation leads to a crisis down the road. The ECB will talk hawkishly, but act dovish, like the Fed in the US.”

Recently, Greenspan argued that the US is about to run out of its ability to raise debt at low rates to finance its growing deficits. He believes that the global capital markets will begin to reject American borrowing because the federal government has no realistic plan to bring down spending and reign-in the national debt.  “The federal government is currently saddled with commitments for the next three decades that it will be unable to meet in real terms,” Greenspan said according to Bloomberg. The “very severity of the pending crisis and growing analogies to Greece set the stage for a serious response.” Greenspan expects that the price the US will have to pay for new debt could rise quickly to 4%, which would increase debt service by tens of billions of dollars a year.

According to an article published by Reuters, on June 11, Deutsche Bank see gold prices averaging $1,215 an ounce this year. In the third quarter it expects to see the metal at $1,200 an ounce, rising to $1,400 in the final quarter of 2010. In 2011, it sees gold at $1,450 an ounce. Barclays see gold prices at $1,215 an ounce in the third quarter of 2010, rising to $1,235 in the last three months of the year. In the same periods it sees silver at $18.50 an ounce and $18.80 an ounce respectively. And, Societe Generale sees gold prices averaging $1,300 an ounce in the third quarter, rising to $1,350 in the last three months of the year. It expects silver to average $21 an ounce and $22 an ounce in the same periods.

TECHNICAL

Prices of gold continue upwards, and with the recent breach of the key resistance of US$1245/oz the price of the yellow metal is likely to continue upwards. My short-term target remains at US$1350/oz.

About the author

David Levenstein brings over 30 years experience in futures, equities, forex and bullion. And, although he began trading silver through the LME in 1980, when it comes to gold, he has traded gold bullion, gold coins, gold shares, gold ETF, gold funds and gold futures for his personal account as well as for clients.www.lakeshoretrading.co.za

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.