Gold and the Worldwide Flight from Paper Currency

In Friday’s essay we discussed the frightening chart of the US dollar index. In particular we focused on the manner in which the Dollar has broken critical support (76) and is on its way to its all time low of 72. Below that… and we’re in uncharted territory.

Long-time readers know that I’m no fan of Ben Bernanke. But Bailout Ben is in no way unique in his thinking (though he has managed to spend more money than WWI, WWII, and the New Deal combined).

Indeed, virtually every central bank in the world has engaged in a massive printing orgy. Australia, Canada, China, Germany, Korea, Russia, even South Africa and Turkey have all engaged in Stimulus plans in one form or another.

They’ve also all done Gold a huge favor by devaluing their currencies via massive money printing. This is most obvious in the US, where Gold has broken $1,000 an ounce (a crucial line of resistance) and hit an all-time nominal high relative to the US dollar (note: I am using the Gold etf (GLD) as a proxy for gold in the charts).

As you can see, Gold has been on a tear relative to the US dollar starting in November of 2008. In terms of world currencies, Gold has made the most aggressive moves again the US dollar, which many thought was simply the result of Bailout Ben’s Quantitative Easing Program.

But then, something strange happened in October. Gold also started breaking above critical resistance levels in the Japanese Yen:

The Euro:

The historically “gold-backed” Swiss Franc:

And even the “commodity-friendly” Canadian Dollar:

For those doubters, the message is clear: what’s going on with Gold today is no longer about Bailout Ben’s profligate monetary policy. We are seeing a full-blown flight from paper around the world.

Gold has called the World Bankers’ bluffs.

Gold has effectively stated: “you cannot print money like mad men and not damage your currency. People will seek a currency that cannot be devalued.”

To be blunt, Gold’s moves against some of the stronger currencies (Yen, Euro) are not as pronounced as those against the US Dollar (they’ve yet to hit an all-time high). However, all of the above charts show Gold breaking above critical historical points of resistance. Most importantly, this is happening across the board.

This is a major sign that Gold is likely entering the next leg up. The story here is no longer about flight from the US Dollar. It is now about a worldwide flight from paper money.

The implications of this are enormous. We might actually be seeing the first signs of a global currency crisis brewing here. For certain, the Dollar’s status as world reserve currency is now in question. But Gold’s moves could also be telling us that no paper money is to be trusted.

Comments

[The Geoffster:]

I bought gold last October as the panic set in and I realized that fiat currencies would be seriously compromised as governments cut interest rates and utilized fiscal stimulus to deal with the crisis. Gold should continue to perform well as an alternative currency until the economy returns to sustained growth.

Oct 27 02:55 PM

[Hans Gruber:]

A global currency crisis? But I thought the recession was over? I thought there were green shoots? I thought the banks were magically healed and that Ben Bernanke is our new savior?

Heh-heh. Buying precious metals you ask.......I say HELL YEAH!

Thanks for the article and analysis Graham.

Oct 27 03:14 PM

[HunterGVL:]

Gold is great long term. Having said that I liquidated my gold position last friday at $1059. The dollar will rally for a bit, providing a better entry point for long term gold. Short term gold bear, Long term gold Bull

Oct 27 03:26 PM

[SmBlkBob:]

Agreed Hunter

Any pull back and I'm back in big time

Bob

Oct 27 03:44 PM

[Bad Dog:]

I guess that would be why gold is down today and the dollar is up? If you look at the rise in gold since it was around $300, it doesn't look like it has been responding to paper money supply. It really looks like a whole bunch of other factors are playing as significant a role. Gold bugs have an idee fixe. Everything that supports their belief is lauded; anything else is ignored. Ultimately, there can be no "major flight" from paper because it is an essential medium of exchange. Gold just isn't. So Gold may go up but that doesn't automatically mean that it's due to a flight from paper.

Oct 27 04:26 PM