Follow the yellow metal road
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Follow the yellow metal road

Central bank and government profligacy in the west and Japan looks set to buoy up the gold price for some time to come.

The gold price shot past $400 an ounce at the end of last year and has moved higher since. I reckon it has a lot further to go.

I am a gold bug because of my mistrust of the political leadership and central bankers of major countries. In the US, Japan and the EU, governments are running unsustainable deficits and, in the first two, central bankers are also priming the system with free money.

If any one of these powers was doing this in isolation, there would soon be a currency crisis, except, perhaps, in Japan, where money is kept at home in banks no matter what. However, as all three blocs are singing the same song: a currency crisis cannot happen.

US profligacy

The region with the biggest external deficit, the US, will experience a secular decline in its currency. Profligate fiscal policy means US foreign policy ambitions already exceed the country's ability to pay for them.

The dollar's decline follows a major drop in the US's national savings rate. This, in turn, boosts the external deficit and will tax the efficiency of the US economy by crowding out productive investment and raising the cost of capital borrowed abroad.

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