India gives fiat currency a straight right to the chin

We are not ‘goldbugs’ at HumanAction. There is a time to own equities. There is a time to own fixed income securities. And there is a time to own real assets. When politicians stick on their Mercantile goggles and take it upon themselves to manipulate currencies weaker in the name of boosting exports to stimulate economic growth, our paper money savings loses its purchasing power. When a government bails out a failed financial system when derivatives with a face value of some one quadrillion US dollars (that’s one thousand trillion) are still floating around the global economy, the financial system has not been cleansed. When the government papering over the problems is the world’s hegemonic state and oversees the global reserve currency, the risk is run that all paper currencies get sucked down a black hole along with it when faith is lost in the ability of government’s to tax its citizens to settle the liabilities. This is when we want to own real assets, and particularly gold for its monetary qualities.

It is not only us, it seems. Today the Indian Reserve Bank bought 200 metric tonnes of gold bullion directly from the IMF. The gold price did not decline on this news, it rose a solid 3% on the day. The gold price rose strongly in almost all major currencies today, and front-month futures priced in US dollars hit an all-time high of $1,088/oz in mid-NY trade. 200 metric tonnes is over 10% of annual gold production. For the gold price to not sink on this news, shows that the tectonic plates are most certainly shifting toward the use of gold as a monetary asset. Although we’ve known this shift has been ongoing since the turn of the century, the data once again just backs up our case. It became evident that the market had become numbed toward the threats of big volume gold sales when the IMF initially announced the 400 tonne gold sale, and the gold price remained steady. Just last week the Russians let slip they might be selling 50 tonnes of gold into the market. This is an enormous amount of physical gold. Once again, gold failed to respond bearishly. Very bullish note must be taken.

We believe there is a massive shortage of physical gold in the market, and that sellers of paper gold have run into a brick wall in the form of Russia, China, and now India. These sovereigns aren’t interested in buying paper gold, they want the real thing, they operate in the spot market, and this is forcing the price higher despite your local analyst who’s still looking for a hint of consumer price rises to validate the move higher in gold. They are looking in the wrong place.

We also urge readers to reconsider their basics of looking at the gold market: it is not the price of gold that is going up, but rather the purchasing power of fiat currencies that are going down relative to gold. Make gold your central reference point to value assets. There is a reason Constantino Bresciani-Turroni priced all asset market and indices in gold in his exceptional book on the great inflation in the Weimar Republic. There is still considerable headroom for gold over the coming few years, and I agree with Jim Sinclair: gold is heading to $1,650 by Jan 2011, and is then on to Alf Field’s numbers of $6,000 – $7,000/oz. It may be happening even sooner.