The real reason behind gold's bull run

Gold's bull run has earned many investors some great profits, including all who got in on Bengt Saelensminde's gold play back in June. Here he dissects the cause of the bull run and goes onto predict what he believes to be the next phase for gold.

Goldis on the move again. And if you've been following my gold strategy, you should have just bought another tranche of the yellow stuff. If not, don't worry. It's not too late. I think this bull market still has legs.

For a reminder on my gold strategy, just click here. In a nutshell, we buy more as the price moves higher. Since we started trading this, we've been buying each time gold goes up by $100 an ounce.

We bought at $1,230, $1,330 and last week at $1,430. As I write, the price is nudging $1,440 and the profits are starting to rack up nicely.

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I reckon there's plenty more to come...

Many pundits seem to think that there's a new reason for gold's recent blast off. They reckon that last year'scurrency debasement stories have given way to fear stories. Specifically fear that unrest in the Middle East is going to hit oil prices and global security...

Global security down - gold up.

But these guys are missing the point. The latest rise in gold is all part-and-parcel of the same old story - there's nothing new here.

Today, I want to remind you of the real story and why it means that gold's bull run has still got legs. It's not too late to join the party...

Why is it all kicking off now?

The question on many a lip is this: How come the North Africa disease seems to be contaminating all sorts of other totally independent countries and why now?

It's a great question, what is the common link that's suddenly making citizens stand up and revolt? Well, that common theme is money. Sure there's a whole plethora of issues lurking beneath the surface, but money (or lack of it) is a sure-fire catalyst for revolution.

The ruling elites of Middle Eastern and North African (MENA) states have managed to keep a lid on religious and tribal differences over recent decades. But when people can't afford their daily bread, they rise up - this is life or death stuff.

Money is at the root of these evils. There's nothing new here at all - this is what happens when money turns bad...

War is raging between hard assets and paper

There's a war on. Commodity bulls know all about it. It's a war that comes around regularly - and the battle lines are drawn between paper currencies and hard assets.

Paper has already suffered heavy losses since the turn of the millennium - its value is much depleted. Confidence in paper money is at an all time low. That's why commodities are getting dearer and dearer.

The UN index of global food prices is up 40% on last year. Corn - an important crop in MENA states is up a whacking 95%.

I know that there's growing global demand for commodities and softs (agricultural commodities) have suffered supply problems- but we've had these issues for decades without such alarming price spikes. You couldn't have had the price spikes we've seen without a load of liquidity' to gee up prices...

It's the central banks' quantitative easing (QE) and zero interest rate policies that led to the great currency debasement. And that's led to the massive price increases we've seen. But the funny thing is that in the West, we've got some natural buffers to the evils that have been going on...

Stock markets have shone as central banks printed money. A lot of new cash went straight into stocks - we've all benefited from that. And many of us hold commodities too.

Shrewd investors will have some direct exposure to the commodities through ETFs and derivatives. Even if its just resource and energy stocks (which now make up around a third of the FTSE 100), you've probably had some benefit from this commodities bull.

And as a nation of borrowers, inflation isn't all bad news. Many an income is linked to inflation, so incomes are going up while loans get inflated away'.

Now, maybe Lord Young was over-egging it a bit when he said you've never had it so good', but there are some pros that sit alongside the cons to this whole currency debasement debacle.


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Get positioned on the right side of this vicious circle

So the story is exactly the same as it was last year - the fear' story of this year is directly related to the currency debasement' story of the last couple of years. In fact, it is the same story. The rioting hoards have never had it so bad... and they want redress.

Unfortunately, as citizens of the oil producing countries hit the streets, fear sends oil prices up further. And oil makes up a massive proportion of farmers' costs. Pesticides, fertilizers and transport, let alone the cost of running their farm equipment are all shooting up.

So food prices go up again. And yes, you've guessed it, this will stoke more political tension - maybe this time contagion will spread to the Far East too. We've not seen the rice price rocket yet - if speculation hits that end of the globe, then watch out.

Think about gold as a unit by which you can measure which side is winning in the great battle between paper currencies and commodities. The war is on and paper is losing.

For paper to make a comeback, central banks will need to raise bank rates - probably to something like 4%, or 5%. And with the threat of an oil-spike induced recession looming, that ain't gonna happen.

That's why I believe gold is highly likely to keep on rising.

Sure this is going to be a rocky road - if you're playing a spread bet make sure you've set your stops at least 10% below the market price. But keep building all the way up - now that the Asians are getting serious on gold there's no telling where this is all going to end up.

This article was first published in the freeinvestment email The Right side. Sign up to The Right Side here.

The FSA does not regulate certain activities. This includes the buying and selling of commodities such as gold. Spread betting is not suitable for everyone - ensure you fully understand the risks involved and never risk more than you can afford to lose. Spread betting carries a high level of risk to your capital. Prices can move rapidly against you and resulting losses may be more than your original stake or deposit. Margin amounts vary between spread betting companies and the type of markets spread bet.

Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.

Managing Editor: Frank Hemsley. The Right Side is issued by MoneyWeek Ltd.

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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.


He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.


Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.


Bengt also writes our free email, The Right Side, an aid for free-thinkers on how to make money across financial markets.