If you asked this question of the “founders” of free market economics, they’d probably roll over in their graves. Twice. Friedrich von Hayek, often seen as the father or modern capitalism, once said that, “With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people.” He was awarded the Nobel Prize shortly thereafter.

The problem of course is that free market currencies are messy when you’re working on the time scale of a two-year electoral cycle. Everyone knows that incumbent politicians tend to lose their jobs when the economy isn’t booming. Yet economies do not boom forever, and thus those looking to hold onto their elected positions do not tend to take kindly to short term slowdowns in economic growth. It’s much easier for them to push for the creation of more money with which to stimulate the economy in the short term, and in doing so, buy themselves a few more votes and a couple more years in office.

Manipulating monetary policy also has another side effect: it allows governments to raise taxes, without raising taxes. Since 1980, the US dollar has lost more than 80% of its purchasing power, chiefly because of the continual increase in the money supply and monetary base (how many dollars are in circulation). As more dollars have entered the market, the value of the existing one’s has gone down. So the government gets money to spend and doesn’t have to raise taxes. The problem is that the $100,000 you had under your mattress in 1980 is now only worth $20,000 in terms of its current purchasing power. So your savings are depleted and the government has more money to spend. Doesn’t that sound like taxes? Imagine if congress passed a bill tomorrow saying they will tax 80% of all wealth held by Americans over the next 30 years. There would be riots on the street. Yet when they do it through currency manipulation, no one seems to notice.

Now there are finally a few bright points appearing in this struggle to free currencies from the grips of politics, and interestingly enough they all seem to involve gold. At this very moment, there are no less than 13 states exploring the idea of issuing their own currencies (most involving precious metals) with which to combat the insanity in Washington. Utah led the charge last year when Governor Gary Herbert signed a law allowing gold and silver coins to be used as common currency for public and private debts, without taxation or capital gains. In other words, Utah has made gold and silver real, active currencies, no different from paper dollars.

Two of the three remaining Republican presidential candidates have been actively calling for commissions to investigate a return to the gold standard. Minnesota, Tennessee, South Carolina, Georgia, Iowa, and Washington State to name a few, may well be on their way to developing precious metals backed currencies of their own. I guess their idea is relatively simple: if private citizens can protect themselves by exchanging their dollars for gold, individual states should be able to do the same thing.

So is the age of currency manipulation coming to an end? Don’t bet on it. There is too much at stake for those currently in power should they lose the ability to control the timing of economic cycles and impose phantom taxes on their constituencies. Still, as it always has, gold is beginning to quietly shine through as a private solution to this growing public problem. No matter what the ladies and gentlemen in Washington decide to do with their paper, they can’t seem to stop gold from becoming the currency of choice for those who don’t want to buy into our increasingly ineffective financial system. Heaven knows if politicians could just print gold it would solve all their problems. Let’s all be thankful that they can not.

Mike Getlin is Executive Vice President of Merit Financial, home to America’s fastest growing physical gold IRA company.  Please send comments or questions to meritprofiles@gmail.com.

Gold has risen 12% this year as worries over the euro zone debt crisis and the Federal Reserve’s pledge to hold U.S. interest rates at historic lows have increased investor demand for the metal as both a safe haven asset and store of wealth. “Gold’s fundamentals are strong and the recent rebound in risk appetite has encouraged investors to come back to the market or add to their existing positions,” Anne-Laure Tremblay, an analyst at BNP Paribas told Reuters. “Anecdotal evidence suggests that bar and coin demand remains high in the U.S. and Europe, with physical gold being bought as a safe haven,” she added. “We expect gold to reach new highs in 2012, although episodes of extreme risk aversion may trigger corrections along the way.”

In the United States, the manufacturing sector grew at its fastest pace in seven months in January as new orders improved, but Jim Walker, Founder and Managing Director of independent research firm, Asianomics, told CNBC on Thursday that the U.S. economy has a 55% chance of slipping back into recession in the second half of 2012. Walker is much more bearish on Europe’s economy, which he says is destined for recession. Walker went on to say he expects central banks to respond with further monetary easing, which will increase demand for precious metals.

The backdrop for gold in the short term continues to be the tug-of-war between the euro and dollar, according to The Street. Leo Larkin, a metals and mining analyst at S&P Capital IQ, told the publication he expects gold to continue in a bull market, with the metal hitting $1,900 an ounce by the end of 2012. “The United States’ [money] supply is up 9 percent from the beginning of the year and the monetary base is up 30 percent,” said Larkin. “They are setting the stage for higher [gold] prices.”

Frank Holmes, CEO of U.S. Global Investors also projects fresh highs for gold, while cautioning investors not to focus on short-term volatility. “People get so caught up with the next three minutes for gold and they should really be focused on the next three years,” said Holmes, who thinks gold price could double to $3,600 an ounce in 5 years. “Does anyone really believe in the long term strength of the U.S. dollar … We’re just going to have to live with this volatility for another 12 months.”

Positive news out of Europe, led by German economic data helped the euro rebound and pressured the U.S. dollar. Despite short-term strength in the euro, the currency is expected to remain under pressure as uncertainty over Greece and increasing concern that Portugal may be the next country to require a bailout continue to plague the financial markets. “Concerns about Greece and Portugal are keeping demand for gold high and supporting the price,” Commerzbank analysts said in a note. “There has still been no breakthrough in negotiations (on Greek debt) … The sovereign debt crisis will thus continue to preoccupy the markets for some considerable time yet and should support the gold price,” they said.

Also lending support to the gold price was the Automatic Data Processing employment report for the U.S., which showed that the private sector added fewer jobs than expected for the month of January. In addition, December’s job gain of 325,000 was revised downward to 292,000. The Street notes that the lackluster data underscores the Federal Reserve’s pledge to keep rates low until the end of 2014, which has been catalyst for record high gold prices.

Several analysts expect gold to breach record highs in 2012 and 2013 as volatility continues in Europe and the Federal Reserve maintains ultra-loose monetary policies in the U.S. Morgan Stanley expects gold to average a record $2,175 in 2013, while Goldman Sachs projected prices as high as $1,940 an ounce within the next 12 months. Standard Chartered expects gold to be near $2,000 an ounce by the end of the year.

Emirates 24/7 notes that the current rally in precious metals is not attributable to speculators, lending support to analysts’ assertions that the bull market in gold and silver will continue. “For both gold and silver, net long positions are still well short of their previous highs, which seems to support further upside moves in both markets,” said Dan Smith, Head of Metals Research at Standard Chartered in a recent report.

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EU leaders endorsed the framework of the new treaty yesterday which would implement a deficit control mechanism by which member states must maintain balanced budgets. Though this is clearly an important step toward financial stability in the region, it does not address the current reality of the staggering debt loads carried by many member states. As such, the agreement also includes the establishment of a roughly $650 billion permanent, full-time bailout fund. Of all the EU member states, only two abstained from the new agreement.

As we navigate increasingly strange global markets, it’s becoming more and more apparent that the Europe situation will continue to take center stage through the coming months. Greece must make a 14.5 billion euro bond payment on March 20^th to stave off default. The funds to be used for this are part of a bailout package, the terms of which are still being furiously debated in Athens. EU representatives (lead by German influence) are demanding deeper write downs of existing Greek debt and even more spending cuts. The outcome of these negotiations will determine whether or not Greece defaults on its obligations, and likely whether or not Greece maintains its participation in the currency union.

At this point, positive news for Europe is positive news for gold. A solution in Greece would bolster the euro and prove to the markets that the EU is capable of dealing with its debt crisis in a way that supports long term confidence in the stability of the union. The strengthening euro would put sell pressure on the overbought US dollar, which would in turn drive gold higher. As all members of the European common market have a significant stake in the success of the Greek bailout, it seems increasingly unlikely that a default will be allowed to take place. Even the Germans know they are better off conceding some of their demands than watching Greece fall completely apart. Thus it’s likely that sometime between now and March 20^th, an agreement will be struck that will do significant damage to the dollar and will thus push gold higher.

The question then is what happens if we’re wrong, and Greece does default. This is a much more difficult situation to model, because there would be two competing forces acting on the gold price. At first, a Greek default would batter the euro and drive the dollar higher in the short term. This could put sell pressure on gold. The only problem with this assumption is that it does not take into consideration the possible increase in demand for gold as a general disaster hedge. Flight to safety buying in this scenario could push gold much higher (cleanly over $2000 per ounce) even with a stronger dollar.

Then there is the question of what happens to the dollar after the dust settles. Sure the dollar could enjoy a period of high demand as people flee any exposure to the crumbling euro zone. Over the longer term however, a collapse in the EU economy would be catastrophic for our economy here in the US as well. Trade would shrivel, international investment would essentially cease, and US exports would be as good as dead. Does this sound like an environment where the US dollar could sustain high valuations? Add to that the fact that election year politics are hardly likely to yield any action to combat the growing deficits here at home, and you start to see how $2000 per ounce gold could just be the starting point from which the real run occurs.

Mike Getlin is Executive Vice President of Merit Financial, home to America’s fastest growing physical gold IRA company.  Please send comments or questions to meritprofiles@gmail.com.

ICTA is the national trade association for all who have an interest in precious metals, rare coins, US and foreign currency, and other numismatic and tangible assets.

“Since 1983, ICTA has been our eyes and voice in Washington, DC. Without ICTA, the industry and hobby are subject to the whims of legislators, regulators, and bureaucrats who are eager to appease whatever special interest group gets their attention.” 

- Terry Hanlon, President,

 

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U.S. equities are down Monday following continued failure by Greek leaders to reach an agreement with Eurozone officials for additional debt relief. “All eyes will be on Europe this morning again,” said Weyman Gong, principal and portfolio manager at Signature to CNN Money. “Global investors are really concerned about the bankruptcy issues — particularly a Greek default, which everybody wants to avoid.” Analysts fear such a default could ultimately result in a domino effect throughout the Eurozone, forcing countries to abandon the shared currency. This would drastically alter Europe’s economic landscape and could drive gold prices much higher.

Looking ahead, Ronald Stoeferle, commodity analyst for Erste Group released his latest price projections for gold into 2013. According to Stoeferle, gold may surge to a record $2,300 an ounce next year. “We are seeing a momentum in gold,” Stoeferle told Bloomberg in a phone interview this morning. “Gold will continue to move up as the correction is over.” Stoeferle went on to say the Federal Reserve’s commitment to keep interest rates low through late 2014 will increase inflationary pressures in the U.S., helping to spur gold prices higher.

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