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Debt monetization and gold

Central banks are committed to monetizing debt in order to solve the massive debt problem the world faces. We have at least five more years of deleveraging to go and perhaps more given our vantage point.

As long as real yields stay negative in most developed markets, competition for gold is scarce. We believe gold is a currency and the more central banks monetize debt, the more gold should continue to rally.

When the U.S. left Bretton Woods in the early 70s, gold started a near 20-year bull market. Central banks were net sellers of gold until a few years ago. We anticipate they will be net buyers of gold for the next decade as money supply expands.

The current efforts by central banks is providing plenty of liquidity to the financial system -- and that part of the plan is working -- but there is no evidence that the expansion in money supply is creating much growth. According to the Federal Reserve Bank of St. Louis, the velocity of money (basically GDP divided by the money supply) is at its lowest level since WWII.

Within a few years, the balance sheets of global central banks will equal 50 percent of world GDP according to some estimates.

In my education segment I show one projection based on the breakout seen a few weeks ago. The trend projects a target in the $2,050 US range by the end of 2013. We suspect a close above $1800 would ignite a rally and we could get there much sooner.


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