subject: Gold broke through the $1265 barrier [print this page] Yesterday gold finally managed to break through the psychological $1265 per ounce barrier and rallied all the way to $1274/oz. Markets have been waiting for this for the last few weeks and now the gold price seems to be on the way to the $1300/oz figure. Uncertainty has returned to the markets after a few seemingly optimistic trading sessions and more new investors are starting to realise the advantages of gold bullion.
The race between central banks seems to heat up day by day as the economy stubbornly remains sluggish despite the efforts from governments to kick start it. Since the biggest economies have chosen the inflation route to climb out of the recession, everyone else has to follow and print out more money. This creates a money printing race since no one wants to keep the value of their domestic currency high as it would disadvantage their exporting industry.
This benefits gold in two ways. As the value of fiat currencies depreciates, gold moves in the other direction because its value cannot be manipulated by any governmental institution. Some day, when we manage to overcome the issues in the monetary system and the economy starts growing again, the extra money pumped into economy will create fast growing inflation. This can be already seen in the UK's economy as the government isn't able to keep the inflation rate below its 3% target level.
China has a giant economy, which is facing a different sort of problem with its currency. China is confronting lots of pressure from the U.S to internationalise the Yuan since the cheap currency is attracting consumers to buy products from China instead of domestic markets. Internationalising the Yuan would help Chinese companies to do business internationally because they wouldn't have to play around with the falling Dollar all the time.
Letting the value of the Yuan rise as much as the U.S is demanding would cause a lot of volatility in domestic markets. The U.S is stating that a 40% rise would bring Yuan into satisfying levels but this would also mean that an average Chinese citizen would lose 40% of his/hers savings, which are tied up in any internationally traded assets, such as gold bullion. Keeping in mind that the Chinese government has been encouraging people to invest in gold, it is unlikely that they will let the Yuan to rise any significant amount.
China could internationalise the Yuan by flooding markets with the currency and just wait that the demand will meet the inflation created. This would satisfy its citizens but not the U.S since it is trying to stop other nations from diversifying their reserves away from the Dollar. It is more likely that China will rather keep its people happy than do what the U.S wants since being a Communist country, maintaining the complacency of its people is far more important than worrying about the Dollar.
In recent weeks governments have been trying to convince investors that the economy is back on the right tracks again but when taking a closer look at the figures one can see that some of the numbers have been manipulated and no significant moves to solve the issues have been made. As long as the fundamental problems in the monetary system remain unsolved, we believe that gold is likely to keep rallying towards new records in 2011.
