Lioness Associates, Inc.

Economic & Corporate Risk/Yield Reports

March 22, 2012  -- Gold, the new Global Currency?

The direction of the price of gold towards the end of 2012 and into the beginning of 2013 is cloudy. Gold started to rise back in 2007 with the home mortgage catastrophe. The first significant jump in the price of gold occurred in September of 2007 and coincided with the "Fed" lowering the interest rate which also debased the dollar. After that, each time a Fed meeting resulted in a lowering of the interest rate, the price of gold would climb along with the prices of other commodities.  As interest rates sunk, the value of gold, oil, and other commodities climbed.

       GLD ETF Price Chart

September of 2008 saw Lehman's collapse initiating yet another rise in the price of gold. In March of 2009, the Stock market drops to new lows causing yet again, another rise in the price of gold.

As more global issues occurred over the next few years along with the "Fed" coming in with "Quantitative Easing", the price of gold steadily increased and only recently has the price of gold been having trouble breaching it's last high.

There are many "gold enthusiasts" in the market citing that the price of gold is likely to hit highs of $2500. That dollar amount seems to be optimistic to say the least but, then again - maybe not. The USA economy while it has not rebounded ferociously, is making slow and steady gains which is acting as an anchor for the rest of the global community.  There are and will continue to be debates on whether the landing in China will be soft or hard - regardless, they have their own issues to address of keeping stability in their country and increasing domestic consumption.  During the period that the developed world  had it's recession, increases in demand from China made up for decreases in demand seen elsewhere and now, the tables are slowly turning and the drop in demand from China will be counterbalanced by increasing demand from other countries.  The key point here is that the drop in demand from China is not likely to fuel increases in the price of gold. On the other hand, political instability in China could be a catalyst to cause the price of gold to increase but, the government is very aware of the problems that unrest can lead to and has been known to exert control to quell protests quickly .

The one scenario that could raise gold prices significantly is if the world moves to a gold standard.  Moving to a gold standard has also been mentioned in James Rickard's book "Currency Wars" which delves into currency issues with great detail.  A move to a gold standard might be in the minds of many investors as it was recently addressed and discounted by Bernanke but that does not mean that some type of change is not brewing. Planetary patterns occurring in February of 2012 suggest changes to the "values" of the USA and that most likely will include the currency.  This could be a signal of reverting back to a gold standard but, it could be argued as well that it could signal that the dollar is no longer the only reserve currency and that the direction will be to have a group of currencies that become the "reserve currency". While China has been mentioned quite frequently as a sought after currency, it is hard to imagine a country that does not have financial transparency being an official part of a reserve currency group although it would likely be an "unofficial" reserve currency as China would make it's own agreements with other countries.  There is also the possibility of a new currency being developed by the IMF to act as a "global currency'.

The price of gold could also increase if terrorist groups move their focus to the financial markets and attack countries through their currencies.  If attacks were made on the USA dollar and/or the financial underpinnings of the country, belief in the safety of the dollar could be severely tested and result in a widespread move to gold and other currencies.

There are countless other possible scenarios but, as the year starts to end there are likely to be hints of what's coming down the road with gold and the dollar so, watch where the news stories and the rumors start to lead.