The Conversation (0)
Gold climbed above $1,700 an ounce Monday in the wake of a credit downgrade on the United States by Standard & Poor’s, causing a plunge in stocks on the Dow Jones, TSX as well as other international markets.
Gold climbed above $1,700 an ounce Monday in the wake of a credit downgrade on the United States by Standard & Poor’s, causing a plunge in stocks on the Dow Jones, Toronto Stock Exchange as well as other international markets. Though North American markets did rebound slightly the following day, gold sustained its bullish performance as investors continue to look for financial safe havens.
“I think people may feel it’s the only game in town,” said Dr. Michael Berry, Editor of Discovery Investing. “The US has very little way out of this problem other than inflating and devaluing its currency. Gold is the ultimate store of value and the market is very well aware of that.”
On Friday, the S&P lowered the US credit rating from AAA to AA+, which is the first downgrade on US debt in almost a century. Causing a further loss of confidence in US currency, Berry says he sees global finances heading towards a place of convergence, where there is no single reserve currency on the market.
“I think the dominance of any single currency in the world is eroding and that will slowly end. And with that the US currency will be replaced by a basket of currencies and some commodities as well. I don’t think there’s any doubt about that happening,” said Berry. “Many things have changed. Who would have thought that the US would have been downgraded from a AAA rating? You can argue whether it really should have been or not, but it was done.”
In the mean time, he says gold – and to a lesser extent silver – is playing the role of store value investments, which he projects could rise above the $2000 an ounce level in the next year or two.
“What you’re seeing here is a turn to precious metals for the security and the safety of the value of the storage of those entities,” said Berry. People have traditionally come to the US capital market as a safe haven and you can see from where the stock markets are, it’s not being viewed that way today.”
Amidst a sustained demand from buyers, there is some talk of gold being in a bubble, high above its actual value and poised to burst. Financier George Soros famously divested his portfolio of nearly all gold in early 2011, calling the metal “the ultimate bubble.” But, Berry says he is confident that with the current global financial situation, there is little chance gold is going parabolic anytime soon.
“It can’t be a bubble at this stage in the game because still very few people are in gold. The central banks are not selling gold so that mops up a lot of supply, and countries like India and China have very low gold reserves and they’re buying,” said Berry. “This is not a bubble, or at least we’re not yet in a bubble. We may end up in a bubble, but bubbles are parabolic moves and gold is not parabolic and neither is silver at this stage in the game.”
Berry says that in order for this trend in the gold market to reverse itself, it would be necessary for a strong fiat currency to emerge on the global scene, though at the moment it does not appear that any will be stepping up to take that role in the near future.
“A strong currency that the world believes in would reduce the role of gold and nobody sees that on the horizon, maybe 10 years down the road, but nobody sees a replacement for the safety value relative to today’s fiat currencies,” said Berry.