Gold Is Shining Brightly Again

02/05/2009 1:00 pm EST

Focus: COMMODITIES

Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, says the yellow metal has performed well even as the dollar remains strong—but he does see danger ahead.

Gold prices are on the move as we [approach] the $1,000-an-ounce barrier we first overtook last March. And as global stocks continue to plunge, about the only area of the market posting any gains at all are mining stocks, gold, and silver.

What's truly amazing about this latest move for gold is that it's occurring amid US dollar strength—a phony rally predicated on global deleveraging and the rush to bring dollars back into cash. The dollar's rally is destined to run out of gas soon, and when that happens I expect gold prices to pierce $1,000 and head to an all-time high before the year is through.

The global financial system is the primary driver of the latest gains for gold and to a lesser extent, silver. Banks in the western industrialized world are effectively insolvent, and governments everywhere are expanding credit like mad to boost plunging economic growth.

In short, investors are worried, and the only place to store your purchasing power amid a major crash in asset values is gold.

This is clearly the worst recession since 1981-82, and some might even coin this environment a "soft depression" as banks are largely bankrupt.

Since late 2007, the Federal Reserve and other central banks, including their respective governments, have failed to stabilize the banks and global markets. The global economy has literally fallen off a cliff since the fourth quarter, with GDP, trade data, and consumption everywhere in a freefall—including China.

If the ongoing efforts to stabilize this financial crisis continue to drag on, it would not surprise me to see gold top $1,500 or more. At that point, we might witness some sort of concerted government action to freeze gold prices or even outright confiscation. I'm not sure how this would affect gold exchange-traded-funds, gold stocks, or gold coins; but one thing is for sure-the Federal Reserve and its central bank buddies don't want to see gold at these levels.

Gold was not allowed to trade in a free market economy during the last several depressions since 1891. In each instance, gold prices were either frozen or [gold holdings were] confiscated, including two periods of deflation in the 1890s and of course, the Great Depression, when FDR confiscated gold and reset the price until Nixon broke the gold window in August 1971.

The best strategy to protect your gold portfolio is to hold the following for ultimate diversification and peace of mind in these uncertain economic times:

1. Buy gold coins. Store part of your holding at home in a safe or vault and the balance in a safety deposit box at a local bank;

2. If you're financially able, store some gold in Switzerland or Austria. Private banks in Europe normally require at least a $100,000 deposit to get started.

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