The stage is set for new gold price highs

Only 2008 saw a larger correction with a drop of 32% (from $1.002 to $681 per ounce), and it set the stage for a major rally and new highs in 2009. As Jim Rogers recently pointed out in an interview with GoldMoney “most corrections go on long enough to scare a lot of people and scare them out of their positions”. If we were to judge by the reports of leveraged speculators exiting their positions, it seems that this weeding of “weak hands” has been achieved.

The explosion of physical gold buying that we’ve seen as a result of lower prices, with especially avid buying in Asian markets, is a good indicator of pent up demand and the growing understanding of the difference between “paper gold” or financial gold, with its leveraged bets, fractional bullion banking, multiple ownership of the same ounces of gold and physical, tangible precious metal. These should be viewed as two very distinct markets, with different dynamics and fundamentals. It is no good to “own” gold futures or gold ETFs as a safe haven, since in a market panic or a bank holiday these are no more liquid than other financial assets, as MF Global clients found out in 2011. Gold derivatives might be useful as a hedging tool, or simply as a speculative vehicle.

Holding physical gold, or having somebody hold it for you in an allocated account, especially if physical redemption-on-demand is an option, is a completely different thing. It is a true store of value and devoid of counterparty risk; it provides protection from currency debasement, political risk and widespread defaults. It gives you the peace of mind that comes from having an asset, not just a claim on one.

As the number of countries flirting with monetary catastrophe through experimental central banking and exponential debt growth increase and the consequences of these experiments start to become clear, the real value of gold becomes increasingly clear.