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Gold Price Holds $1,370, Outlook Bright

Release Date: 
Wednesday, February 16, 2011

GOLD PRICE NEWS - The gold price hovered near unchanged at $1,374 per ounce Wednesday morning, showing very little reaction to this morning"s inflation data. The price of gold, which had climbed 3.1% this month, held firm after the release of the January Producer price Index (PPI). The PPI rose 0.8% month over month and 3.6% year over year - both roughly in-line with market expectations. This marks the seventh consecutive month of price gains for this data set and helps underscore why inflation worries are becoming more intense.

The resurgence in the gold price was on display yesterday as gold surged $12.00 amid modest weakness in the U.S. dollar. Silver has rallied alongside the gold price and now sits higher by 9.6% in the month of February. Yesterday"s close in gold"s sister precious metal marked the second highest close for silver since 1980.

The gold price is trading at a five-week high and the all-time high print of $1,431.50 per ounce in coming into view. One prominent investor that has cited the bullish case for the gold price in recent quarters is Kyle Bass, who outlined his market view in a recent investor letter. Mr. Bass, Managing Partner of Hayman Capital Management, provided his outlook on the global economy, quantitative easing, and rising fiscal deficits across the globe.

Bass presented a rather bleak outlook for many of the world's developed economies - particularly the U.S., Japan, and several euro zone nations - due to unsustainable debt levels that risk the solvency of their federal governments. Citing Harvard Professor Ken Rogoff, Bass noted that "sovereign defaults tend to follow banking crises by a few short years," which would suggest that such defaults may be approaching in the near future.

Furthermore, as Japan has illustrated, once countries experience near-zero interest rates for multiple years, a small increase in rates can have exponential effects on debt service and eventually lead to interest expenses outweighing revenues. While Bass asserted that the U.S. has not reached this "Keynesian endgame" yet, it is currently on the path toward it. This is due to America's mountainous fiscal deficits stemming from policymakers' decisions to continue kicking the proverbial can down the road.

Accordingly, Bass urged his investors to "ask yourself one simple question: Does debt matter?" and went on to say that "It was excess leverage and credit growth that brought the global economy to its knees. Since 2002, global credit has grown at an annualized rate of approximately 11%, while real GDP has grown approximately 4% over the same timeframe. Credit growth has outstripped real GDP growth by an astounding 275%. We believe that debt will matter like it has every time since the dawn of financial history. Without a resolution of this global debt burden, systemic risk will fester and grow."

The fact that the gold price has risen in concert with global credit growth since 2002 is no coincidence. As central banks have debased their currencies in order to fuel economic growth, investment demand in the one form of money that cannot be depreciated has climbed. If Bass' contention that "systemic risk will fester and grow" continues to materialize, the outlook for the gold price remains bright.

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This article is independently provided by and does not represent the views or opinions of Goldline International, Inc. Although the information in this article has been obtained from sources believed to be reliable, Goldline does not guarĀ­antee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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