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The 2017 Case for Gold

DailyReckoning  |  Byron King

“The case for owning gold strengthened,” noted The Wall Street Journal last week, “boosted by geopolitical concerns…”

The Journal continued, “Gold prices shot to their highest level in five months [last] Friday, after a weaker-than-expected U.S. jobs report and a U.S. airstrike in Syria. Prices hit $1,273.30 on Friday and are up around 9.5% for the year.”

Geopolitical concerns also boosted demand for gold, noted the Journal, which then pointed out that “moves [in gold] from unexpected events, such as Friday’s airstrike, are usually short-lived. Many investors remain concerned about growing tensions between North Korea and the U.S., however.”

By the way, gold soared more than $20 yesterday. It’s up again today, too.

I don’t disagree with the Journal that sharp price spikes in gold-silver based on geopolitical events can come and go. At the same time, I believe that shooting cruise missiles at Syria has opened a can of worms that will be difficult to clean up.

I expect more of those geopolitical events and more sharp upticks. All that and we’re looking at a long-term trend of gold prices moving up. We’ll be seeing higher highs on top of higher lows.

Gold has additional tail winds, as well.

For example, Russia and China are moving closer toward creating a gold-based trading system, according to an article last week from Russia Insider.

If nothing else, it’s accurate to say that we’re definitely hearing footsteps and watching the beginnings of “de-dollarization” in trade between the world’s largest nation and its most populous.

Up to now, there has never been anything approaching a serious challenge to the global supremacy of the dollar — certainly not in global trade. Yet here we are, watching Russia and China set up a proto-trading system based on gold. The daily quote for gold seems not to price in even a hint of this development.

Yet it could have world-altering implications as it all unfolds.

The next step is for Russia and China to expand gold-based trade to other BRICS nations — that acronym referring to Brazil, Russia, India, China and South Africa.

A gold-based trade regime for BRICS would expand the now bilateral Russia-China gold system and move further down the road to creating a new globally accepted currency that has a 5,000-year pedigree.

If this new idea succeeds at even a modest scale, we can expect that not just gold but global oil prices will move away from being a pure-play trade based on dollars.

Indeed, if enough other nations adopt the Russia-China gold idea, expect that the dollar will revert to a more regional currency used by the U.S. in trade with mostly “G-7”-type Western countries.

Sooner or later, we may see more and more countries break away from the dollar collar and join the gold-trading world. In that case, gold prices will soar and shares in well-run gold mining companies will explode upward.

Closer to home, I’m not sure what the good news might be for the U.S. economy. President Trump’s Obamacare reform never reached a vote. Tax reform is a back-burner issue for the year. Student loans and auto loans are dodgy in the aggregate. Wages are stagnant on the best of days.

We’re still in an economy where most of the “new” money — those mysterious bucks created from raw ether by the Fed — quickly moves into the hands of a very few people living in very high-end ZIP codes. (And even in those pricey ZIP codes, real estate prices are languishing.)

From what I can see, we have decades worth of inflation lurking just under the surface of much of the economy, coupled with weakness — if not rot — riddling the economic structure.

Add it all up and it bodes poorly for the strength of the dollar, which means it bodes well for gold-silver and for mining shares.

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