Mohamed H. Zakaria, Jeddah published 4 February 2006

Gold as Refuge

The report “Global Liquidity Bolsters Gold”(Jan.16) needs some elucidation. Gold has been undisputed king of assets. For 6,000 years, it has been the safest way of storing wealth. Signs are that it will continue to be so. Global gold demand is rising rapidly, recognized, as it is, as the ultimate refuge in financial and political storms. As history has taught us over and over, the Western equity credit bubble will burst at some time and the consequences will be catastrophic. When that happens, the 153,000 tons of gold in the world wouldn’t be enough to go around. The annual rate of increase in the global mined supply of gold has continued to dwindle due to weak prices of gold in the last decade as most gold mines were unprofitable when its price was around $300 an ounce. Now, though the prices have touched a 25-year high, it will still take mining companies many years to meet the demand.

Western central banks, which hold more than 31,000 tons of the world’s gold, have always used their gold reserves to manipulate and suppress gold prices to mask reckless expansion of fiat currencies. With Nixon’s fateful decision to sever the critical links between the US dollar and gold in 1971, all semblance of discipline in fiat currency growth has forever gone. As a result, gold has suffered in the last two decades like no other asset class; it was beaten down to the earth.

Many analysts believe that even at $550 an ounce, gold is very cheap. Historically, gold and oil have moved in close symphony. For the most of last 55 years of the last century an ounce of gold has been worth 15 times the price of a barrel of crude oil. At times this ratio has risen to 17. However, currently, even with gold at $550 an ounce, this ratio is very low at nine.

There are two events that can bring the 15:1 ratio back: A sharp rally in gold prices pushing it to $900-$1,000 an ounce or a sharp drop in oil prices to $35 a barrel