Gold’s strong performance over the last two years must be seen as an acceleration in the deleveraging of the global financial system. After many decades of inordinate credit creation—leading to excessive debt levels, asset bubbles, and too much monetary interdependence between nations—the financial system has started to heal itself through a rising price of gold.The gold price will continue to rise in the years ahead until stability is restored.Increased trust in credit instruments since the Second World War has inflated the global financial system to startling proportions. Rising geopolitical tensions, the debt overhang, and inflation are now undermining this trust, leading to a new balance between financial instruments with counterparty risk (credit) and without counterparty risk (gold) in favor of the price of gold (deleverage).Before we dive into the data that shows rising price of gold can easily double in the coming years, let’s begin with some theory. The Hierarchy of Financial InstrumentsSimplified, the economy can be divided into the financial system—consisting of financial instruments such as money, stocks, bonds, and derivatives—and goods and services.What distinguishes financial instruments from goods and services is that the former have no “use-value” to us humans. We can wear a sweater, eat a sandwich, ride a bicycle, and hire a contractor to paint our house. That’s why goods and services are often referred to as the real economy.More By This Author:Axel Merk On Markets, Gold, And Global DynamicsDebt, Bonds And Gold: Has The Federal Reserve Overdone It?Recession Watch: Are Americans Close to Hitting Their Credit Card Limits?
