Gold will stay high for a very long time

As I write, gold is knocking on the door of $1,900 an ounce. And if you have been following my pyramiding gold strategy, you’ll have noticed just how quickly those $100 up-moves have been coming round!

What we are witnessing is a seismic shift in the gold market. Investors and emerging market central banks across the globe are fed up with governments debasing currencies. So they are taking matters into their own hands. You could argue that they are re-establishing a gold standard.

And you need to be on the right side of this move. Today, I’d like to talk about why I think gold has established a new and sustainable price level. And why if you don’t already have a gold buying plan, I think you should get started straight away.

Currencies have been over-valued for 40 years

Central banks across the globe are scrambling for gold. They’re looking for a new and more robust reserve in the light of devaluing currencies.

As early as November last year, Robert Zoellick, the president of the World Bank, called for a global reserve currency based on gold. Since then countless emerging market central banks have been topping up their gold reserves.

Shrewd investors have been on the right side of this move. I am certainly not alone when I say that gold isn’t going up, so much as fiat currencies are going down. To my mind, paper currencies have been way over-valued for quite some time, and investors are realising it. In a sense, gold is nothing more than a short on paper currency.

Our academic friends tell us that gold should have gradually adjusted upwards over the last forty years. All the time that banks printed paper currency, gold should have gone up to reflect all the new notes in circulation.

But it didn’t! Gold stayed low for decades as faith in paper grew.

But with the credit crisis that faith has been shattered. And gold is now being pushed to centre-stage as a global reserve currency. Not because of central planners, but despite them.

In fact, compared to gold, paper currencies aren’t the only assets that are deflating.

Is anything holding its value?

Take property. When the pundits say that prime London house prices have held up very well over the last three years, it’s not strictly true.

Measured in most currencies other than sterling, they haven’t. And given that it’s largely foreign buyers propping up Mayfair, Knightsbridge and Kensington house prices, then it’s an important point – measured in foreign currency, the market is down.

And if you measure the market in terms of gold, the picture changes radically. In fact, in terms of gold, the inflation/deflation debate is well and truly put to bed.

The value of just about everything is deflating relative to gold. Why? Because currencies have been living in an inflated dream world for nigh on forty years.

The credit crisis of 2007/2008 was the top of the market for bank-created paper money. And not everyone has cottoned on.

We can do even better than the central banks

Many people have misconstrued MoneyWeek’s position on gold.

Investing in gold has been good advice for ten years now. And readers that heeded the advice will have made a few quid out of it.

But gold investing isn’t so much about making wealth as preserving it. As investors, we can play the gold market in the same way that the central banks do. We can use it to save wealth.

In fact, we can do even better than the central banks. The banks are buying bullion to stash in their vaults, and it’s driving the price up. At the moment, the stock market doesn’t seem to believe the shift in gold is sustainable. The price of gold mining stocks doesn’t reflect the explosive moves going on in the bullion markets.

I believe that gold has established a new and sustainable price level. And that means gold stocks look cheap and have the potential for a great upward move.

I’ve mentioned Dominic Frisby’s gold report many times. If you haven’t got a copy, I think you should. It’s a robust plan to build exposure that could prove very profitable over the years to come.

If you missed the recent spike in gold, then don’t get mad… get even.

Now is the time to buy gold stocks.

• This article is taken from the free investment email The Right side. Sign up to The Right Side here.

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  • Colin Selig-Smith

    It never goes up in a straight line. It’ll bounce back down in a bit. It’s worth watching the platinum, and silver ratios to gold. Platinum and gold are 1:1 just now, usually platinum is more expensive. I’m looking for a 10% correction in gold relatively soon before it continues to go up.

    Venezuela just demanded physical delivery of their gold from the central banks… Possibly the cause of the increase.

  • Cliff Hanger

    This excellent presentation by Mike Maloney explains the real fundamentals behind currencies and gold. It’s 90 minutes long but may be the most productive 90 minutes you’ll spend.

  • Charlesdb

    Please help me here. When the world goes pop, there has to be a time when people want to sell their ‘gold insurance policy’ to survive.
    So – here’s the scenario. Everyone wants to sell their gold to cash in on their insurance policy. Trouble is, no one wants to buy or has the money to do so. The rush to sell is so great that servers seize up. The price collapses. Lines of desperate sellers queue outside the offices of Bullion Vault demanding their money. ETF’s plummet in price. People are starving. A loaf of bread costs £50. Next day it costs £100. Inflation soars, Gold price falls to earth.

  • Mike

    The trick Charlesdb is in selling the gold before it reaches its peak. That way you would have made the most money out of it. Thus your money would have been preserved, handled inflation and you are well off to buy a 50 sterling loaf.

    At least that is the way I see it.

  • Barkingmad

    “When the world goes pop…”

    If it got that bad – not much point holding your gold in an ETF etc. as paper money will mean nothing and you won’t be able to ‘access’ your gold as even though it may be stored as ‘physical’ gold you will not be able to turn up and demand your bar as governments would probably sieze it first.

    People must still have some faith in paper money as they are expecting to be able to transfer their ETFs back into paper at some point. If you really believed the end was nigh you would be buying sovereigns.

  • mike

    “when the world goes pop …”

    why would you convert it to cash at all? gold would be the only stable currency, banks would be collapsing and atms offline. look what happened in the 1930’s gold didnt crash it went stratospheric right up until the 1950’s along with gold mining shares. If this terrible scenario approaches hold onto physical gold, if you want to hold electronic use something like where you can rapidly switch between cash/gold and country or storage. Flexibility will be key here. They cant confiscate gold globally, many asian countries holding gold is as normal as having a bank account in the west.