Bullion Dollar Investment

I could think of a few reasons why gold is invested in and why I think this pullback may not be a big one and why gold is going much higher, and probably sooner than many on Wall Street believe possible.

Reason #1: Europe's Debt Problems Haven't Gone Away. The United States isn't the only country with a debt crisis. The euro zone has its own government debt/banking crisis, a crisis that nearly sank the euro mere months ago, as Portugal, Ireland, Italy, Greece and Spain teetered on the brink of insolvency.

Europe was able to paper over the problem for a while, but now we're seeing Irish 10-year spreads moved to 5% and Greek spreads to 9%. Investors are starting to bet those governments will bust their budgets.

So, worried Europeans are (again!) moving into the safety of the hard currencies — gold and silver. It's a trend that could continue through December as Greece holds elections and Ireland wrestles with a new austerity budget plan.

Reason #2: The Debt Crisis Is Global. The Wall Street Journal recently reported that the 15 most advanced nations of the world, including the United States, will have to borrow a whopping $10.2 billion in 2011. The money is needed to repay maturing bonds and finance budget deficits.

Japan is in worse shape financially than the United States. But the US is giving the Japanese a run for their money. The Federal Reserve has committed to buy an additional $600 billion in U.S. government debt over the next eight months.

This raises another red flag. The International Monetary Fund (IMF) warns that the chances that investors will balk at lending to governments "remains high for advanced economies."

If the risk of government default is rising, where do you hide out? Gold and silver are a good place to start!

Reason #3: Central Banks Continue to Buy. You know who's not worried about the high price of gold? Central banks. They continue to snap up the yellow metal; obviously they're banking on higher prices.

There are two parts to the central bank/gold equation: Buying and selling. On the sell side, central banks and the IMF sold about 94.5 metric tons of gold in the year that ended last month. Most of this was IMF gold. And the total was down a whopping 40% from a year earlier!

On the buy side, we know that countries including Russia, Venezuela and India are buying a lot of gold. In fact, Russia has been steadily building its stockpile of gold all year, buying it every month. It started with 16.7 million ounces in January and just added another 500,000 ounces in October to hit 19.5 million ounces.

Even developed nations are buying gold — France's gold as a percentage of its reserves rose from 42.5% to 63.3% and Portugal jumped to 83.7% in 2009 from 39.9%. And China is probably buying a lot of gold, though we won't know until long after the fact.

Reason #4: Investors Are Piling Into Gold. Central banks aren't the only ones not deterred by higher gold prices. Investors large and small aren't blinking either. The World Gold Council estimated late last month that gold holdings in ETFs hit a new record in the third quarter.

What's more, a new gold ETF just made its debut in Hong Kong. The Value Gold ETF will hold its gold locally, and offers Asians unnerved by the global currency and debt crises a new way to hedge their portfolios.

Reason #5: The World Starts to Shift Away from the U.S. Dollar. If you watched my video Tuesday, you know that I have turned short-term bullish on the U.S. dollar. But that's just a zig-zag in a long-term bear market for the greenback.

The storm clouds gathering over the U.S. dollar are ominous. French President Nicolas Sarkozy recently emerged from a meeting with China's leader Hu Jintao, and called for a new global monetary system.

Since the current system is based on the U.S. dollar as the reserve currency, this move is a direct assault on the dollar's primacy. And since gold is priced in dollars, if the dollar is going down, gold will go up.

In fact, World Bank chief Robert Zoellick said in an article in the Financial Times that the Group of 20 leading economies should consider adopting a global reserve currency based on gold as part of a bigger reform of the global financial system.

Such a move would be an end to the current global regime which is based on the dollar as the world's reserve currency. That would cut the hamstrings on the U.S. dollar.

So ask yourself, how can both the euro go lower and the U.S. dollar go lower? The answer is that both are going to go lower against hard currencies — gold and silver.

Reason #6: Gold Is Running Rings Around the S&P 500. The S&P 500 is up nearly 9% so far this year, which seems pretty good. But that's only because the S&P 500 is priced in dollars, and the U.S. dollar's big trend is lower. What happens if you price the S&P 500 in gold or silver?

Thank you Unconventional Wisdom

Hari Patti

Currency games

A big debate between investors, officials and financiers has been how much of the QE2 by the Fed is an attempt to devalue their currency. Some say that it is the primary (hidden) agenda of QE2. Others (and the Fed itself) believe it is a by-product of QE2 which is essentially aimed at spurring (domestic) economic growth.

One of the primary reasons why the dollar has been under pressure in the recent months has been the diversification of central banks (mostly in Asia) away from the USD. Historically these banks had been accumulating dollar reserves to anchor the appreciation of their own currency.

What is interesting is that if the Fed is really trying to devalue their currency by QE2, it doesn’t seem to be working. Ever since Bernanke’s Jackson Hole speech in August which was the first seemingly strong hint for a QE2, the dollar index, which tracks the USD against a basket of 6 leading currencies, fell more than 10% from its peak. Post the $600bn QE2 announcement, though, the dollar has rallied nearly 3%.

There is of course, Ireland and other Eurozone worries to a large extent to blame for that. But even then, I doubt the impact of QE2 being able to depreciate the dollar. The conventional wisdom of the dollar devaluing due to QE may not be applicable in this world…where if “I’m in bad shape, there are others who are in even worse shape.”

There could be other possibilities nevertheless. You buy the rumor and sell the fact. Markets overreact to rumors of QE2 and price in more than what is going to come, unknowingly.

If the European crisis were to worsen further, the dollar could gain more strength. This will only be amplified by emerging market countries putting restrictions on capital inflows. That may not do much to ease concerns in emerging markets. It does not mean that the dollar is going to experience a sustained rally; it may very well face weakness as the Fed continues its asset purchases for the next seven to eight months. Nevertheless, if domestic data continues to show improvement (nonfarm payrolls, consumer confidence Michigan index) the worst of the dollar slide may just be over.