Gold and silver succumbed to profit taking (gold down 3.2% and silver down 2.5%) last week as risk appetite returned to markets with the tentative recovery in equity markets continuing.
Gold’s performance was lackluster, despite increasingly bullish news with regard to growing acceptance that the international monetary system must be reformed and the strong probability that gold will again play a more significant part in the international monetary system. A UN panel, the Chinese, Indians, Russians and others are calling for significant monetary reform and for the over arching dominance of the US dollar to be replaced by a multi polar currency world, less dependent on the mighty dollar.
The G20 meeting in London this week will likely see these demands come centre stage and could lead to strength in the gold market.
The Russians have now clearly stated their aim to return to a partial Gold Standard which they believe will return discipline and stability to the international monetary and financial system. The world’s fiat paper currencies have lacked any anchor since 1971 (when Nixon ended dollar gold convertibility for countries) and many rightly believe that the financial excesses and extreme debt leverage of the last quarter century would have been impossible under the discipline of the Gold Standard or even a partial gold standard.
Russia favours the inclusion of the Chinese yuan, Russian rouble and gold bullion in the basket-weighting of a new world currency based on Special Drawing Rights issued by the International Monetary Fund.
Investment demand is set to remain robust as savers internationally are punished by miniscule interest rates and negative real interest rates. Also the failure of the UK government bond auction and fall in bond prices last week will lead to understandable concern as to whether government bonds are the safe haven they are claimed to be.
The UK and US government’s bailing out of sections of Wall Street and the City of London combined with unprecedented massive money printing and deficit spending will soon be realized as yet another failed short term panacea that will likely make the financial crisis worse in the long term.