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Monday, November 15, 2010

US PRINTING NOTES AGAIN: DEBASEMENT OF CURRENCY

"MONEY MONEY MONEY!!!!"
On November 3, 2010. Federal Reserve chairman Ben S Bernanke decided to have a second round of Quantitative Easing (QE2). He decided to pump in $600 billion into US economy by buying additional Treasury Bond through June in order to reduce unemployment & avoid deflation by printing money. And printing more & more money would be more “Debasement of your Currency”. This will lead to surging commodity prices & asset bubbles not only in US but also in Emerging Markets. The US Fed reserve calls it liquidity into the financial system by merely printing more & more dollars, which are not backed by real assets such as Gold. Technically, there is no limit to this printing, i.e. No supply restriction on paper currencies. This is what economist called “Debasement of Currency”.

Gold has unique characteristic of store of value which is not with paper currencies, which tend to lose value over a period of time due to inflation (loss of purchasing power) caused by over supply of printed money.

We will compare the Currency in Circulation issued and the underlying Gold held by concerned Central Banks in developed countries. Divide the Gold reserves (in tonnes) held by Central Banks with the currency in circulation (in billion $) of the respective countries will give us a ratio, a Gold to currency ratio.

In 1973, Gold held by US central bank was 8,584 tonnes & currency in circulation was $61 billion. Dividing the gold held by the currency in circulation, we get a ratio of 140.2 for that year. i.e. 140.2 tonnes of gold was held per $1 billion of currency in circulation. In the year 2007, US central bank held 8,133 tonnes of Gold & the money in circulation was whopping $759 billion. The ratio comes to 10.7 .i.e. only 10.7 tonnes of gold held per billion dollars in circulation.

If the US were to get back to the 1973 ratio of gold held per billion $ in circulation, it would have to increase its Gold Reserve to whopping 1,07,153 tonnes from current 8,133 tonnes, an increase of more than 13 times in potential demand. With the financial crisis not over yet, Central Banks like FED would continue to inject more & more money into the financial system. Thus the debasement of currency will continue, making real asset like GOLD & SILVER more & more attractive as an hedge against reducing purchasing power & loss of faith & confidence in paper currencies.

We should thank GOD that US does not have a printing press for Gold. The YELLOW metal may be the only Savior of our wealth over longer term. That sure makes a case to buy GOLD. As far as our INDIA is concern, India’s M3 supply in INM3MS=ECI as on July 16,2010 was Rs.57,821.41 billion from Rs.56,770.76 billion (June 18,2009) & Rs.4984.46 billion on July 3,2009.GOLD RESERVE AS ON SEPTEMBER 10, 2010 – 557.7 tonnes.

SO..GOLD IS ALWAYS A BUY EVEN AT THIS PRICES. BUY IN GRAMS IT SURELY WILL MAKE YOUR WEALTH SLOWLY BUT SURELY.....
Read my previous post on GOLD - CLICK HERE -  MORE ON GOLD

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