Gold Is as Good as Cash

by: Equedia Network Corporation

It's been a week that had everyone scratching their heads. We started off with a bang. Stocks climbed and commodities continued their rally from last week (see Doubling Down for the Big Bang).

The TSX hit a two-year peak, closing above 13,000 for the first time since Sept. 2008, as gold miners rallied sharply after the price of bullion powered to an all-time high of $1400. Silver also shot past $28. But all that came to an end by Friday.

The stampeding bull market in commodities hit a wall Friday as China told everyone they will try to slow its economy to tame inflation by raising interest rates once again. As the world's largest consumer of many raw materials, any hint of slower economic growth sends goosebumps through commodity markets.

But as gloomy as the market ended, it doesn't mean that things are about fall. Look at it as more of an excuse to take profits. Don't forget, we've already made some substantial gains in raw materials, stocks and bonds since late August. With December coming around the corner, it's inevitable that we would have a short term correction.

Just last week, we mentioned China's PMI index showing signs of strong growth. Just because China will be looking to slow growth and avoid rising inflation, doesn't mean they're going to stop growing. Commodity prices and emerging markets have already shown strong signs of growth and are expected to continue throughout the next year.

There's little doubt that QE2 (Quantitative Easing 2) will help keep mortgage rates down. It will also be great for banks, and make it easier for corporations to borrow. But with the Fed pouring close to a trillion dollars into the market, higher prices for basic goods will continue to rise.

We have to remember that the trillion dollar program doesn't occur overnight. It will be spread out over the next year and it will take time for that money to enter the market-place. As it does, the price of commodities will slowly, but surely, continue to rise.

Let's not forget the price of precious metals. Many contrarians are already calling gold overpriced and in a bubble that's about to burst.

Gold offers no income, no dividend, and no earnings. It has very few industrial uses and gold production is rising (see Smaller Than You Think). It's also at an all-time high.

How Precious is Gold?

Despite all of those factors, gold is still precious.

Earlier in the week, Former US Treasury Official and current World Bank President Robert Zoellick said that Gold is the "elephant in the room" that must be addressed by policymakers and central banks as discussions of a new international monetary system move forward. Gold is now being used as an alternative monetary asset because of unease about the strength of developed economies.

Although not a move to a gold standard, gold could be used as an "international reference point of market expectations about inflation, deflation and future currency values...Gold is now being used, being viewed, as an alternative monetary asset. This is not the same as a gold standard."

So while it is highly unlikely that there will be a move to a gold standard, as it would make central banks unable to fight inflation or deflation and unable to boost employment, gold should still be considered as an alternative monetary asset - much like the Special Drawing Rights (SDR), a type of currency asset created by the International Monetary Fund (see A New World Currency? What the US Goverment Doesn't Want You to Know).

As Good as Cash

While Contrarians argue that gold does nothing but sit there and look pretty, gold is as good as cash.

For the first time in modern history, this theory has now been proven.

Using Gold to Buy Oil

As of November 22, 2010, clearing house ICE Europe will begin accepting gold bullion as initial margin for crude oil and natural gas futures trading.

This marks the first day in modern financial history that gold will be eligible collateral for energy futures. And this is a big deal. A really big deal. The only form of collateral allowed by ICE before this was cash, and government securities. But with this announcement, ICE has effectively made gold equivalent to cash and government bonds.

And this trend is expected to continue.

Although no time frame has been set, rival clearer LCH Clearnet has also been considering accepting gold as collateral for some time.

Using gold to margin on oil marks a new era in making gold a usable and credit worthy currency and we can expect that other firms may soon follow suit.

Even if you believe that gold at its current levels may be overvalued, there are still ways to profit from these high prices.

And as mentioned many times in previous newsletters (see past newsletters), the junior resource market is our favorite way of playing the precious metals boom.