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Recent gains are but a drop in the bucket for gold bullion prices.

October 26, 2011 – It certainly has been an agonizing wait for gold bullion to break back through the $1,700 mark. But gold is still so undervalued that it will take a whole lot more than that to convince me that the market is back in charge.

Fiat money throws a huge monkey wrench into the markets. Left alone there is nothing simpler than market mechanics. Two parties come together, each having something the other wants. The come to agreement on the relative values and make the exchange. Both leave with something they perceive to be of equal or greater value than that which they gave up.

It works because the markets only transfer wealth between the parties. They do not create wealth.

Money in any form, including gold bullion, is no more than a measure of wealth. In and of itself it is worthless until it is used to make a purchase. For millennia gold has been a stable and universally accepted measure, proving it to be a reliable store of wealth.

Fiat money, however, has nothing tangible to give it worth unless the source of the currency balances its money supply with its reserves of gold. The greater the gap between the two the weaker the link between the currency and wealth. Today most fiat monies have become so diluted that the market participants can no longer come to agreement on their value.

One notable exception in the recent past was the Swiss franc. While the franc is not officially exchangeable for gold the Swiss have always maintained sufficient gold bullion reserves to balance their money supply. But rational monetary policy cannot hold up against a world hooked on fiat money.

There was a rush on the franc by investors looking for anything that promised to be a store for their wealth. The price of the franc soared, threatening the Swiss with serious inflation. The only way they could get back in control of their economy was to join the party and weaken their currency.

The global economic crisis cannot be resolved until the markets are freed to put things in order. And that will not be possible until significant correlation can be reestablished between currency and gold bullion.

It definitely will not be easy. If we were to balance the books today and go back on the gold standard, gold would have to rise to more than $11,000 an ounce. That be a reasonable argument against making a sudden switch, but ignoring the problem entirely would be a grave mistake.

I won’t believe that the free market is back in control until gold bullion prices start making real progress on balancing out the global flood of fiat money.

Daily Updates Archive

Jonathan Monroe

Senior Staff Writer -

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