Gold is the Hottest Currency in the World

By Robert Lenzer, Forbes Staff, 1/28/2012
The price of gold is roaring back from its latest temporary correction, sending the bears into full withdrawal. If you sold your gold in December as it fell to $1525 an ounce, you’re probably feeling foolish at the incredible $210 rise to $1735– a 15% move in no time at all.

Gold, you see, is not a commodity like oil and copper and wheat. It is rather an alternative currency– one that finds buyers when paper currencies like the Euro are being hugely increased in supply by the ECB to forestall a sovereign cum bank crisis in Europe. There’s $650 billion in European bank and sovereign debt coming die before March 31, 2012 which can be sopped up by the $650 billion gift from ECB to the banks at the bargain rate of 1%. And more available from the European central bank– Europe’s very own Quantitative Easing program.

As the supply of gold cannot keep up with paper money(supply increases very little despite exploration), and it can be bought without loss of any real interest income, it seems clear t hat the gold bull market is alive and well. Central banks obviously are of the mind that gold’s rise will make up for t he decline in paper money and the lack of income on central bank liquid investments.

Then, too, the speculators already dumped 42% of their long positions between August and December, 2011 according to the High-Tech Strategist, a January 5, 2012 market letter by Fred Hickey that I strongly recommend. Hedge funds sold to meet redemptions. Hot money ran at warnings by technicians.

The truth is that the drop to $1525 in December triggered the renewed buying by the Chinese, who are the new incremental buyers in the world. The Chinese prefer to buy on weakness and not compete with the central banks of Russia, Korea, Thailand,Singapore and are buying to hold.

Zhang Jianhua, the research bureau director of the People’s Bank of China, was quoted in the POBC internal newspaper as insisting that “The Chinese government needs to further optimize China’s foreign exchange asset portfolioi and seek relatively low entry points to buy gold assets.”

Gold, apparently, is the Chinese priority for a “safe haven” when slow economic growth leads to widespread monetary easing and fears of ultimate inflation. Gold more than stocks or bonds or real estate, is obviously seen as the preferred way to store wealth. In that sense the Chinese are way ahead of the US and Europe.

After all its moves in 2011 gold was still up about 11%– more than stocks any place, and only beaten by 10 year US treasuries. Treasuries at 2% aren’t viewed as a reserve currency. Gold is the hottest currency in the world. Just ask the Chinese.

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