Currency, Sovereign Debt and the "Gold Bubble"

The following valuable perspective is acknowledged from the respected Calafia Beach Pundit blog of June 7, 2010. The issues of sovereign debt, currency movements and the inflation/deflation question are aspects of the economic machinery that the global gold price reflects in the present cycle stage we may come to call the Keynsian end-game.
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"The euro (as the extension of the DM) and the dollar have been moving pretty closely together relative to gold. That is to say, both have depreciated by almost the same amount since 1978, with the dollar for the most part leading the way. You might say the euro's current weakness is more in the nature of "catch up" to the dollar than anything else. Recently, the euro was trading at a nice premium to the dollar, but that premium is no longer justifiable given eurozone credit concerns and the bailout of Greece.

"The euro - relative to its purchasing power parity vis a vis the dollar - has not changed much at all since 1978. It was slightly overvalued then as it is now. In other words, relative to 1978, one euro today will buy you about the same basket of goods and services in Europe as it would in the US. So the message is that both the euro and the dollar have fallen by more or less the same amount relative to gold. The yen is the only currency that is worth more today, in terms of gold, that it was in 1980.

"Regardless, the movements of all major currencies relative to each other are now dwarfed by the movement of all currencies relative to gold. ...If gold is still the timeless standard against which to measure currrencies as it has been for centuries, then today it can be said that the relative valuation of one major currency relative to another is an order of magnitude less important than the relative valuation of all currencies relative to gold.

"If all major currencies are losing value relative to gold, that is a good sign that the world's supply of money exceeds the demand for it, and that is a necessary precursor to rising inflation. We should expect to see inflation rising in just about every country, and it ought to show up first in lesser-developed countries, since their economies are generally more exposed to international trade and have a lot less inflation "inertia" than the US economy.

"I continue to believe that it makes a lot more sense to worry about inflation than it does to worry about deflation, given the significant rise in gold over the past 10 years."
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For investors, physical gold can be held through the US ETF PHYS and more popularly but perhaps less securely in the US ETF GLD. Gold stocks on whatever market vary in quality from investment grade (primarily based on proven reserves) to speculative (unproven or proximity to proven reserves) but are generally seen as being more responsive (leveraged) to gold price movements than the metal itself.

Disclosure: long Jinshan Mines (JIN), soon to be renamed China Gold International Resources.