Dear Reader,

The safe haven asset is back in the spotlight along with it a plethora of smiley gold ETF salesmen peddling their paper wares.

Now, I think I’ve heard just about every story for and against gold, and generally they’re all a huge pile of steaming… nonsense.

And, yet gold smashed through its all-time dollar high of $1,275 on Friday, making a few wise investors richer than their wildest dreams…

So why is there suddenly such a high demand for gold?

Merryn Somerset Webb, editor in chief of MoneyWeek UK,reveals the truth behind the yellow metal and tells us exactly why we should be aboard this crazy gold rush ride….

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Where is this gold price going?

Renowned technical analyst Yonaton Rom has predicted a move as high as £5,000 an ounce!
Is it possible?
Given that ten years ago not many people expected the price to ever hit even $500 again it just might be.

Really, gold’s upward journey speaks for itself. As you can see from the ten year chart below the upward trajectory in the gold price is quite spectacular.

Source: Metastock

So, what's got gold moving?

In one word: Currencies. There has been a good correlation between worries over sovereign debt in Europe (as expressed by the rising yields on debt issued by the 'peripheral' countries - yields rise as prices fall) and the gold price. This subject might have fought its way off the front pages, but is still lurking nastily in the background. The euro is just as much at risk as it was six months ago.

But it isn't just the euro bothering gold: It’s the general race for the bottom among all currencies. The dollar has been on the slide recently (which of course partly explains the new high in the dollar gold price) but the Bank of Japan has now started intervening to get the yen down too. It has just sold something in the region of ¥300-500bn (£2.3bn to £3.9bn) worth in its efforts, reports Reuters.

That's worth noting simply because it’s their first intervention since 2004. The Bank has clearly finally had enough of the strong yen stifling whatever recovery might be skulking behind the dismal economic data. The Japanese stock market surged as exporters applauded the move.

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Watch out for deflation

But gold isn't just looking for today's currency degradations: it is also watching for the deflation that will bring more of them. There isn't much obvious sign of it about… US Consumer Price Index (CPI) inflation calculated using European methods it isn't much lower than UK CPI (currently 3.1%).

But regardless of the immediate evidence, the prevailing opinion is now biased towards deflation. We are constantly told that all the things keeping our numbers above target are temporary influences, which in a matter of months will be cleansed from the data. Perhaps they are (although with commodity prices rising at speed it isn't exactly a given). But if there is one thing gold knows, it is that nothing brings inflation along faster than the fear of deflation.

There's more money printing to come

Banks and governments hate stable prices. Without inflation they can't get on with their general work of favouring borrowers over savers and cutting the real wages of the population in the name of competition. So the very idea that the CPI might fall below 2% is enough to prompt massive intervention. There's bound to be more quantitative easing (QE) to come.
And that, as the gold price is desperately trying to point out, will almost inevitably undermine currencies and leave us with very high inflation.

All this means is that we should hang on to our gold: as all governments work to erode the value of their own currencies via inflation or outright intervention it is still pretty much the place to be.

But here at home things are a little different…

It’s a little more difficult for South African investors, looking for rand based gains, to take advantage of the recent gold rally.

The rand is a commodity based currency so when gold price rises in dollar terms we often find the local currency strengthening and forcing down yields.

The South African Reserve Bank hasn’t implemented measures to curb the strong currency yet andthis had led to less than impressive gains on rand denominated gold investments.

Until next week,

Gary Booysen
Analyst, Stockmarket Sleuth

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