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What Will Gold Do Next?


Most people probably believe that gold is merely rising because of the "weak dollar", but that's not the case. Gold has been rallying in all fiat currencies for some time.

I've suggested before that while the dollar is doomed, it may not "crash", as many have suggested, because foreign central banks will eventually be forced for a variety of reasons to step in and halt the decline. The end result will be that the only crash that the dollar experiences is a crash against Gold.

The dollar will probably rally eventually (and perhaps this process is beginning as we speak?) due to central bank intervention or foreign central banks simply easing in concert with the Fed in order to prevent their currencies from appreciating too much and hurting trade. In the end, this sort of activity is bullish for gold in all currencies, not just in dollars, because foreign central banks are being forced to debase their currencies as well in order to keep the dollar-based monetary system functioning, just as the Fed was recently forced to ease in order to keep the highly leveraged financial markets functioning.

Yesterday we had our first big one-day setback in gold after the euro sold off against the dollar in the wake of squealing over in Europe by EU politicians that were concerned about the strong euro's negative effect on trade and calling for some sort of intervention in order to support the dollar/depress the euro. As a result, the possibility of intervention began being discussed by the marketplace, and the euro reversed as a result, which bounced the US dollar index and caused a minor selloff in gold.

Note what is happening today, however, in the intraday chart below of gold compared to the euro. As the euro continues to slide against the dollar ahead of tomorrow's ECB meeting, where the ECB may be forced to drop its hawkish bias, gold is not following the euro to a new low for the week. Instead, gold is resisting the euro's tug and holding above yesterday's lows around the unchanged mark. One day doesn't make a trend, but this is something I've been expecting to see, as foreign central banks were eventually forced to support the dollar and import dollar-based inflation as a result.

Click here to enlarge.

Most people probably believe that gold is merely rising because of the "weak dollar", but that's not the case. Gold has been rallying in all fiat currencies for some time. Even though the euro has clearly been the strongest major fiat currency, even it has been weakening against gold (see the chart below of gold in euros).

Again, gold is not merely rallying because the dollar is sagging against the euro, which makes up about 60% of the US dollar index. Gold is in fact rallying in all fiat currencies, even as the dollar sinks against virtually all of them per the trade-weighted dollar index, which made another new multiyear low just last week (see the chart below).

Click here to enlarge.

Obviously, the US dollar index has never in history been at the levels we are seeing today. Gold has likewise never seen a higher monthly close that we have seen this year and has never been at its current levels on a daily basis except for a few weeks back in January of 1980. What are all of these "records" telling us?

In my view, these record lows in the dollar and gold's record rally are both a reflection of the breakdown in the global monetary system that has been based on the fiat dollar since the early 1970s, just as the Bretton Woods system broke down in 1971 when the flow of gold out of the US became too great and the US was forced to close the gold window and move to the fiat dollar-based system that we have today.

This time, the Fed's repeated bailouts of its various bubbles with the printing press (which Helicopter Ben is once again employing against the housing bust today) and other abuses have repeatedly weakened the dollar over time and are directly responsible for the massive financial imbalances that exist in the world today. The imbalances that have built up under the current fiat dollar system are now simply too great for the system to continue as it has. That is what I believe the market is now telling us by sending the various dollar indexes to record lows and sending gold to near record highs. In essence, I believe the market is giving the fiat dollar system a vote of "no confidence" and is now in the early stages of fleeing to gold.

This should become even more apparent when gold breaks out to new highs in euros, along with the new highs that we're already seeing in gold in dollars, which I suspect will probably happen before the year is out (see the charts below).

The question now is what monetary system will replace the fiat dollar system? I don't know the answer to that, but I do know that gold, as the ultimate store of value, will maintain one's purchasing power until we do know what that new system is.

Gold in Euros

Click here to enlarge.

Gold in Dollars

Click here to enlarge.
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