The Breakout Gains Momentum

It was a good week for both gold and silver.

Though one of the week's biggest losers against gold was the US dollar, other currencies also dropped. Gold rose 2.5% on the week against the dollar, 2.0% against the Japanese yen, 1.1% against the Swiss franc, 0.7% against the euro, and only 0.1% against the British pound, which was the strongest currency this past week. It is worth noting that gold also rose 2.3% against both the Indian rupee and South African rand, and 3.4% against the Canadian dollar. In summary, gold was up compared to all the world's major currencies, reconfirming that the global breakout I noted in the last alert continues to unfold.

As we can see from the following charts, the nascent breakout of the precious metals is becoming clearer. The breakout will continue to gain momentum as the price of gold and silver climbs further away from the consolidation patterns (the green triangles) on the following charts.

It was particularly good week for silver, which climbed a very noteworthy 7.5% on the week. Since touching its $10.70 low on October 4th, silver has gained a remarkable 30.6%. It has clearly outperformed gold, as we can see on the following chart of their ratio.

Given this performance by gold and silver, the question arises, what is driving the precious metals higher? Many would argue that it is the dollar. After all, take a look at the following chart, which is enough to scare any holder of dollars into the safety and security of the precious metals.

The dollar has clearly broken down from the trading range which confined it since early 2005 and has now begun another leg down in its ongoing bear market. But it is not just the dollar that is driving gold and silver higher. As I note above, the precious metals are climbing against all currencies. So while the dollar is no doubt a big problem, particularly because it is the reserve currency of the world, it is not the only problem.

The real problem is that the international monetary system is broken, built as it is on fiat currency. There is no discipline on the process of money creation by central banks, and people are starting to notice and react to the huge amounts of new money and debt being created. In short, the real problem can be summarized in two words - fiat currency.

The important point is what we can learn from monetary history. Regardless of the country and currency that one examines, the precious metals in the end have always won the battle against fiat currency. So it is logical to expect that gold and silver will continue to climb higher until some discipline is again imposed on central banks, as it was by the classical gold standard.

Will that discipline be imposed? Do governments ever see the folly of their actions? Again, the lessons of monetary history are important. Governments never impose discipline on the money creation process. They instead invariably destroy their national currency by debasing its purchasing power, and gold and silver are responding because this prospect lies ahead for all fiat currencies.

Published by GoldMoney
Copyright © 2006. All rights reserved.
Edited by James Turk, alert@goldmoney.com

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