But why is gold rallying? We have written continually about gold over the past three years so our views should be well known by now. Nevertheless.. we are living through a period in finance that is likely to enter the history books, and not in a good way. Since Nixon took the US dollar off the gold standard in 1971, world currencies have been backed by nothing more substantial than the promises of politicians. While this makes the perceived value of one currency versus another somewhat subjective, it also makes the generalised trend of fiat currencies per se somewhat predictable: they will all tend to depreciate over time against harder assets, as fiscal rigour and tough economic choices typically get bypassed in favour of bribery, corruption and lies. Which is where the bankers and central bankers come in. The first leg of the bull market in gold was a purely political one, courtesy of the end of the Bretton Woods currency system. The second and current leg of the bull market in gold has been driven by market developments, as financiers overleveraged themselves and their institutions while the regulators looked the other way. Seeking to shore up the financial system has meant governments taking on the liabilities and malinvestments of the banks. Since these liabilities and malinvestments dwarf the amount of money in circulation, government guarantees have effectively bankrupted the governments forced to undertake them. These governments were already buckling under the weight of their own indebtedness, but the scale of their new liabilities essentially gives them no option now but to try and impose panic austerity and (perhaps not so quietly) to try and inflate their problems away. So the fiat currency backdrop was already problematic pre-crisis, but now it looks fraught. Whether or not we end up charred by inflationary fire or entombed in deflationary ice, gold (and now silver) is acting exactly as one would expect, as an early warning device signalling what in extremis could turn out to be the wholesale restructuring of the global monetary order. A knee jerk warning of simple inflation this is not.

David Fuller's view This issue also contains a superb long-term chart of the Dow / Gold Ratio. We do not have as much back history but here is the Dow / Gold Ratio since 1975. Clearly, the Dow remains in a secular downward trend against bullion.

What is there not to like about gold (monthly, weekly & daily)?

I have only one short to medium-term reservation: I do not know anyone who is not bullish of gold, which has now risen for eight consecutive weeks. However, aside from the usual attention seekers who compete in issuing the highest targets for bullion, this is far from a euphoric, climactic, bubble environment. I expect genuine gold fever before this secular bull market ends, similar to what many of us witnessed in 1979. That could be five to ten years away and will probably be even more dramatic than 1979 because the fundamentals for gold are more bullish in this cycle.