Gold and silver all-time record highs (INFOGRAPHIC)

See how high gold and silver prices need to climb to beat their all-time record highs when adjusted for inflation.

Gold broke it’s 1980 all-time record high of $875 an ounce in 2008. The yellow metal’s now trading north of $1,500 an ounce. Silver surged to a brand new all-time record high of $49.45 an ounce on April 28, 2011. While the “nominal” or “face value” record highs for the metals have been broken, gold and silver are still trading well below their all-time record highs when adjusted for inflation. Check out the infographic below to see how far gold and silver are from their inflation-adjusted highs:

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Source: Wall Street Journal.

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Utah gold standard takes pot shot at the Federal Reserve

Utah’s new gold standard bill takes a symbolic jab at the Fed. And it’s a jab that’s representative of the pent up anger over the federal government’s fiscal irresponsibility.

Utah just got a lot of street cred by firing the first bullet in the war against the Federal Reserve’s loose monetary policies. The state’s Governor Gary Herbert signed a bill into law last month that recognizes gold and silver coins issued by the U.S. Mint as legal tender in the state.

Unfortunately, the bill doesn’t go so far as letting you exchange gold and silver for goods and services based on the value of the underlying metal. Instead, Utah residents would have to use face value on the coins to purchase goods and services. That means people probably won’t be using Eagles to pay their mortgages or car payments (since the face value is far less than market value), but nonetheless it’s a symbolic jab at the Fed. And it’s a jab that’s representative of the pent up anger out there.

It’s not just Main Street that’s upset about government spending; it’s state governments, businesses and voters, too. And there are few voices speaking more loudly against rampant inflation than Texas Congressman Ron Paul.

“The gold standard would keep you from printing money and destroying the middle class,” Paul says. “Every country where you have runaway inflation, there’s no middle class. Mexico, there’s no middle class, you have a huge poor class, and a lot of wealthy people. Today we have a growing poor class, and we have more billionaires than ever before. So we’re moving into third world status.”

While Utah’s bill stops short of recognizing all forms of gold and silver as currency, it does contain a nice tax benefit. Utah investors who buy and sell gold and silver coins for investment purposes no longer have to pay state capital gains taxes on the metal.

A number of other states appear to be following Utah’s lead by introducing their own gold and silver currency bills. Georgia and Iowa have put forth legislation that would mandate state taxes be paid in gold and silver, according to MotherJones. Indeed, more than a dozen states have floated or are in the process of debating alternative currency bills.

It’s a step in the right direction, but I’m still not convinced we’ll start seeing progress until banks are allowed to issue gold- and silver-backed debit cards that can electronically exchange bullion for U.S. dollars at checkout terminals.

I wrote about just such a scheme recently in my post How would a gold standard work in the 21st Century? It’s Utopian thinking right now, but if the government can’t rein in spending before we’re subject to runaway inflation, I suspect I wouldn’t be the only one who would sign up for a gold- or silver-backed debit card.

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Can gold hit $1,500 per ounce?

Not many traders doubt gold prices will hit $1,500 an ounce; the question is whether it will happen in April or six months from now.

Gold bullion prices are poised to top $1,500 an ounce as the metal’s in the midst of powerful upswing driven by war, the nuclear disaster in Japan and growing fears over inflation. Gold has risen for the past nine trading days – the best string of gains since March of 2008.

This week could see the metal climbing even higher. A survey at Bloomberg found 83 percent of traders and analysts expect prices to continue up this week.

“All signs point to $1,500 as a short- to mid-term target for gold,” writes George Leong at WallStreetPit. “The trading volume in the June gold been surging during the breakout and this is bullish.”

Leong thinks $1,500 gold prices could come by the end of the year or sooner. I’m beginning to think it’s going to happen sooner – a lot sooner. Gold prices spiked more than $50 per ounce in trading last week. A similar rise through Friday of this week would put gold at another record high of $1,522 an ounce.

There’s a cloud of uncertainty hovering over Wall Street as the macro-economic picture reaches a crossroads: either the recovery truly starts taking hold, or we’re facing another global derailment. There’s almost too much bad news out there to report:

   •  The U.S. government still needs to reach a budgetary agreement
   •  China’s hoarding commodities at levels not seen in seven years as fears over inflation spike
   •  Japan’s treasury liquidations could put severe stress on the U.S. bond market just as QE2 is slated to end in June
   •  Crude oil for May delivery topped $113 yesterday as the fighting in Libya intensified

Gold’s still well below its all-time inflation-adjusted high of some $2,500. Even as the metal surges, though, it’s losing ground on silver with the gold:silver ratio falling to a 28-year low (near 35) on Friday. That makes sense as silver’s generally more volatile than gold, and the high cost of gold bullion could be pushing retail investors into silver.

Nonetheless, all eyes will be on $1,500 gold this week. Not many traders doubt the metal will reach that level; the question is whether it will happen in April or six months from now.

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15 gold price predictions for 2011

A number of influential traders and executives have publicly weighed in with gold price forecasts for 2011. Here’s a recap of the more memorable predictions from 15 trading professionals and individuals.

A number of influential traders and executives have publicly weighed in with gold price forecasts for 2011. Here’s a recap of the more memorable predictions:

Chuck Jeannes: Goldcorp Inc.’s (NYSE:GG) CEO sees gold at $1,500 an ounce as “easily achievable,” and he could see the price eventually rising as high as $2,300 if and when inflation sets in (The Street)

Dennis Wheeler: Coeur d’Alene Mines Corporation’s (NYSE:CDE) CEO “would not be surprised” if gold prices rose to $1,500-$1,600 an ounce in 2011 (Reuters)

Sean Boyd: Agnico-Eagle Mines Limited’s (NYSE:AEM) CEO argues gold at $1,600 an ounce in the next 12 months would “not be a stretch” (Reuters). “Gold will ultimately go above $2,000 and I think it’s going to go in steps so I could see $1,600 this year,” he tells The Street.

Mark Cutifani: The CEO of AngloGold Ashanti Limited (NYSE:AU) see gold range-bound between $1,300 and $1,500 an ounce in 2011 (The Street)

Rick Rule: The founder of Global Resource Investments, which was acquired by Sprott Inc. (TSE:SII), expects “some event-driven spike in metals prices.” “I have no earthly idea where gold will close, but to be a good sport and play the game, I’ll say $1,750,” he says (SeekingAlpha)

Aaron Regent: CEO of Barrick Gold Corporation (NYSE:ABX) tells The Street he believes the “forward curve would suggest a gold price in the $1,500 range” (The Street)

Ian McAvity: The founder of the Central Fund of Canada (CEF), Central Gold Trust (GTU), and Silver Bullion Trust (SBT.U) expects a “monetary panic” in the dollar or euro to push gold to $2,000-$2,400 per ounce this year or in 2012 (SeekingAlpha)

Mark Bristow: The CEO at Randgold Resources Ltd. (NASDAQ:GOLD) expected gold to rise as high as $1,500 an ounce (The Street)

Morgan Stanley (NYSE:MS): The investment bank has set a gold price target of $1,512 an ounce for gold in 2011 (The Street)

Ross Norman: The co-founder of TheBullionDesk.com is looking for gold to trade between $1,350 and new all-time highs of $1,850 per ounce (SeekingAlpha)

The Street reader survey: Of the almost 6,000 people who have taken The Street’s gold poll, 47 percent believe gold prices will finish between $1,500 and $1,800 an ounce in 2011 (The Street)

James Turk: The founder and chairman of online precious metals vendor GoldMoney.com sees gold sprinting much higher “probably in the first half” of this year to $2,000 per ounce (SeekingAlpha)

Charles Oliver: The senior portfolio manager of the Sprott Gold and Precious Minerals Fund, Oliver sees currencies around the world continuing to plummet in 2011. He expects that will push gold up to $1,700+ by the end of the year (SeekingAlpha)

Adrian Ash: A researcher at BullionVault sees individual savers moving into gold bullion this year as negative real interest rates erode buying power. That could push gold 20 percent higher this year to $1,695 an ounce (SeekingAlpha)

Richard O’Brien: The president and CEO of Newmont Mining Corporation (NYSE:NEM) sees gold eventually rising to $1,750 an ounce by 2012 thanks to the protection the metal provides against inflation. In 2011, he sees gold trading between $1,350 and $1,500 an ounce (Reuters)

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What could cause a gold price crash?

A fast and furious correction in gold prices to $400 an ounce sounds hyperbolic. Still, every investor should always look toward worst-case scenarios before investing. Here are a few things that could prompt a gold price crash.

There hasn’t been a shortage of gold skeptics during the 10-year run-up in gold prices that started in 2001. That’s probably a good thing, though. It’s only when everyone is convinced that a commodity is heading higher that the risk of a dramatic correction in prices sets in.

Still, at least one portfolio manager is sounding the warning bell on gold prices. Charles Lemonides of New York’s ValueWorks, LLC, recently appeared on Canada’s Business News Network arguing that if gold dips below its March 15 lows, we could be in for a steep sell-off that might see gold prices tumble to $400 an ounce.

“I think there’s a lot to be said for what’s happening in the gold market and the commodities markets setting up for a classic collapse,” he said on Wednesday, according to IBTimes. “Once that correction starts it becomes very fast and very powerful and is very dangerous for investors.”

A swift fall to $400 an ounce wouldn’t so much be a “correction” as a “wholesale slaughter,” but Lemonides argues that gold producers are rapidly building up capacity that will soon flood the markets with cheap gold. That could drive down demand and – in a sort of trading echo chamber – push prices even lower as scared investors jump ship.

Still, a fast and furious fall to $400 an ounce sounds hyperbolic to say the least. But every investor should always look toward worst-case scenarios before picking a potential investment. Here are a few things that could prompt a gold price crash:

Changes in Fed policy. It’s no secret that one of the biggest drivers for gold prices right now is the loose monetary policy that the Federal Reserve has embraced. With interest rates near zero and quantitative easing in full force, there isn’t just a threat of inflation in the future; it’s almost a sure thing. Investors eager to protect their capital in an inflationary environment are moving into gold out of the hopes of protecting their assets against debasement of the dollar. If the Fed were to suddenly and unexpectedly announce a change in policy (an interest rate hike, or an early end to QE2, for example), gold prices would likely fall in the near-term.

A surging dollar. One of the more curious outcomes during the height of the housing market crash and financial crisis in 2008 was the surge in the value of the dollar – even as the Fed took extraordinary measures to inject more liquidity into the economy. The dollar climbed as investors sold off their stocks, swapped their currency for greenbacks and ditched just about every other form of investment they were holding. The net effect was a 28 percent plunge in gold prices between March and November of 2008 from more than $1,000 per ounce to $720 per ounce.

A brand new gold rush. The third and least likely scenario (in my mind) that could cause a rapid decline in gold prices is precisely what Lemonides describes: a sudden surge in gold supplies. Excess supply could push down prices quickly and trigger a panicked sell-off in gold. I just don’t see that much supply entering the market in the short-term. Gold prices have been rising for a decade and that gives gold producers enormous incentive to get their product to market. They’ve been working hard to increase output for years, and they’ll continue to do so. It would take a new world-class deposit that’s buried under just a few feet of soil in an easily-accessible, politically-stable region to spark a large sell-off in gold. More than likely, though, it’d just spark a rush into the shares of the company that owns rights to that deposit.

That’s not to say I take the chances of a gold sell-off lightly. If sentiment turns against precious metals, it will do so quickly, but I can’t see sentiment changing in the near future – particularly as rumors of QE3 hang like a cloud over the future of the dollar. And, as investors grow increasingly wary of the dollar’s prospects, it becomes more unlikely that’ll we see a repeat rush into the dollar like we saw in 2008 should another Black Swan swoop down on the market.

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Top 3 reasons to invest in gold in 2011

A number of factors have collided since the start of the year to cause gold prices to rise, and that’s got analysts and newsletter writers arguing that the bull market in precious metals still has legs. Here’s a run-down of the top three reasons to invest in gold in 2011.

One of the most difficult aspects of investing is determining all the inter-related factors that lead to price changes for a particular commodity, whether that commodity be cotton, natural gas or gold ingots. Gold spot prices started off the year by tumbling more than $60. Since the start of February, prices have climbed more than $100 to settle (at the time of this writing) near all-time record highs around $1,430 per ounce.

It’s not just the looming threat of inflation that’s driving up gold prices, though. A number of factors have collided since the start of the year to cause gold prices to rise, and that’s got analysts and newsletter writers arguing that the bull market in precious metals still has legs. Here’s a run-down of the top three reasons to invest in gold in 2011:

1) Protection. In the face of global currency debasement, there are few remaining places left where investors can safely stash their cash. As the value of the dollar, the Euro and the Yen fall concurrently, the price of gold and other hard commodities including oil rises. Gold not only acts as a hedge against debasement but it’s also a tangible store of value. If we do face further geopolitical turmoil or natural disasters, gold should help protect your assets no matter what direction fiat currencies move in the short-run.

2) The Federal Reserve. So long as investors can smell the faintest whiff of QE3 in the air, they’re going to be wary of hunkering down in cash. QE2 has been a boon to gold prices, and QE3 could compound those gains by weakening the dollar so severely that investors and foreign investors run from it. Indeed, that will make U.S. exports more attractive on foreign exchanges, but it will no doubt ratchet up fears of inflation. Inject an economy will enough cash, and money velocity will start to rise. That’s when we run the real risk of forming bubbles, and my bet is the next bubble could be in precious metals. If you think we’re already in the midst of a gold bubble, wait to see what happens if the Fed announces plans to proceed with yet another round of quantitative easing after QE2 wraps up in June. Even the threat of QE3 has investors nervous.

3) Demand abroad. It’s tempting to look at the gold and precious metals markets from a distinctly American point of view, but much of the demand for physical gold and silver is also being driven by foreign markets. Investment demand for gold in China rose 84 percent in the fourth quarter of 2010, according to Money Morning, and that demand could keep growing there and in India as the expanding Middle Class in both countries is already living with high inflation. Should that inflation spike higher, expect gold prices to follow.

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Gold price flirts with all-time record highs

With the dollar tumbling to a 15-month low, gold spot prices have risen more than $30 over the past five trading days. That’s pushed the yellow metal less than $10 shy of its all-time record high of $1,444.40 an ounce.

With the dollar tumbling to a 15-month low, gold spot prices have risen more than $30 over the past five trading days. That’s pushed the yellow metal toward its all-time record high of $1,444.40 an ounce – a record that was set on March 7.

Investors have shown a preference for precious metals as a safe haven in the face of turmoil in the MENA region and the devastation in Japan. Traditionally, the dollar has served as a refuge of last resort, but analysts argue that the Fed’s quantitative easing program has encouraged investors to look elsewhere.

“The dollar is not currently a safe haven in times of macroeconomic uncertainty because any downward revision in global and U.S. growth automatically means a higher risk of QE3,” Beat Siegenthaler, senior currency strategist at UBS, wrote in a note to clients (per MarketWatch).

The Fed’s policies are making it more difficult to maintain investor confidence in the dollar, but an unexpected rise in interest rates or a premature halt to QE2 would likely spook the markets as the U.S. recovery looks promising but is far from a sure bet. The end result is a move into gold, silver and other precious metals as investors look for ways to protect their assets.

Gold spot prices spiked as high as $1,435 an ounce in early trading yesterday; less $10 shy of all-time record high prices. It’s a trend that will likely continue so long as the threat of QE3 hovers over currency markets.

Yesterday’s top-performing gold mining stocks (mostly microcaps) all rose more than 10 percent with Vista Gold Corp. (AMEX:VGZ) sprinting up 19.1 percent. Here’s a look yesterday’s other winning precious metals stocks:

  •  Mines Management, Inc. (AMEX:MGN) +18.2%

  •  Alexco Resource Corp. (AMEX:AXU) +12.3%

  •  Kobex Minerals Inc. (AMEX:KXM) +11.3%

  •  Kimber Resources, Inc. (AMEX:KBX) +10.3%

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How would a gold standard work in the 21st Century?

Utah’s proposal presents an interesting wrinkle on the gold standard by allowing an official alternate form of legal tender to co-exist with the dollar. Would such a proposal be feasible? Perhaps.

The recent news that Utah representatives have passed a bill that could usher in a gold standard, got me wondering what it might be like to have a gold standard that co-exists alongside the U.S. dollar.

Traditionally, the gold standard worked by fixing the value of the dollar to a set amount of gold. Consumers bearing dollars could visit a local bank and exchange their dollars for bullion at an exchange rate determined by the government.

The problem, of course, was that by fixing the value of the dollar to a specific commodity, the government no longer had the means to artificially increase the monetary supply. If authorities wanted more dollars in circulation, they’d have to increase gold holdings in order to back those dollars.

Utah’s proposal presents an interesting wrinkle on the gold standard, though, by allowing an official alternate form of legal tender to co-exist with the dollar. Businesses and consumers could exchange dollars OR Federally-issued gold and silver coins during financial transactions.

[Related: Utah gold standard could become a reality]

Would such a proposal be feasible? Perhaps. To illustrate, let’s imagine a world where your bank or financial institution offered you a special, gold-backed savings account. By transferring dollars from your checking account into your gold-backed savings account, you’d effectively be “buying” and holding gold. Rather than being denominated in dollars, cash in your savings account would be denominated in XAU (the currency symbol for gold).

For its part, the bank would allocate physical gold holdings to your account whenever you transferred cash into your gold account. The bank would store this gold in a vault and, presumably, charge you a fee for the service. Under such a scenario, if the price of gold rises relative to the dollar, your savings would rise, too.

Ideally, your bank would also allow you to make purchases directly from your gold-backed savings account. You’d swipe your debit card as you always do, the gold in your account would be exchanged for dollars at prevailing rates and your purchase would be processed in dollars.

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The beauty of such a scheme is the value of gold to dollars wouldn’t be set by the government as it was in the past, but rather, it would be electronically determined by the current market price for gold.

Sounds like a win-win for everyone. There are dangers in such a plan, though. If the public started to show a preference for holding gold over dollars, the value of the dollar would plummet and the price of gold would rise dramatically. Banks would have difficulty backing your savings with physical gold and investor confidence in the dollar might crumble – not just here but around the world.

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The biggest threat to any currency, of course, is a loss of faith in that currency. We’ve seen that happen in South America during the ’70s and ’80s, Germany after World War II, even during the dying days of the Roman Empire. If consumers were to lose faith in the dollar, they’d be eager to spend their dollars for whatever material goods they could get their hands on and prices would begin to rise quickly.

Utah’s plan to create an alternate legal tender might accelerate a rush out of the dollar. But it seems to me that process has already started. Perhaps what we’re seeing play out is simply a symptom of a bigger problem: the U.S. debt burden has become too large. No matter how much Americans might like to return to our post-war lifestyles, the balance of power is shifting East. Our consumption levels have to fall more in line with reality, and that’s going to cause pain along the way.

If there is a way to have the dollar peacefully co-exist alongside an alternate tender in the U.S., though, the solution lies in the banking system. Give me the ability to sign up for a gold-backed money market account or a gold-backed savings account, and I’ll happily sign on the dotted line.

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Utah gold standard could become a reality

If inflation becomes a reality, though, the appeal of such a system might be worth the headaches. Just last month, J.P. Morgan announced it would take gold as collateral for loans. It’s a sign that more sophisticated gold and silver transactions could be on the way.

If you’re not convinced the threat of inflation in the U.S. is real, there’s a handful of Utah senators (17 to be exact) who respectfully disagree. The Utah Senate passed HB317 yesterday, 17-7, moving the state a few steps closer to a gold and silver standard. The bill allows businesses and individuals to exchange federally issued gold and silver coins instead of paper dollars in financial transactions.

The gold and silver would be valued at face price instead of the underlying value of the gold and silver. A state committee will now look at whether Utah should recognize an official alternate form of legal tender. Utah Governor Gary Herbert, who has not taken an official stance on the bill according to the Washington Times, will have the final say to veto or sign it into law.

If the bill ultimately becomes law, the implications would be interesting. On one level, it’s a symbolic move designed to send a message to Washington. On another, actually using gold and silver as legal tender would be difficult as users would have to file federally required transaction reports, according to the Deseret News.

If inflation becomes a reality, though, the appeal of such a system might be worth the headaches. Just last month, J.P. Morgan announced it would take gold as collateral for loans. It’s a sign that more sophisticated gold and silver transactions could be on the way.

Here’s a hypothetical (that won’t play out in Utah): what if employers could pay employees in gold and silver? That amount could be electronically deposited into employee accounts not in USD but in XAU (the currency symbol for gold) or XAG (the currency symbol for silver). Banks could then issue special debit cards so that purchases could also be made in XAU and XAG.

If a business didn’t directly accept gold or silver as tender, credit card companies could apply an exchange rate for the gold or silver in the account, charge a fee to the purchaser and convert the purchase amount to USD at prevailing prices.

If the dollar were in the midst of a free fall, the consumer who’s holding gold or silver in the bank rather than dollars, would win. Utah’s law is a symbolic step in the right direction, but until we can use gold and silver as currency based on the underlying value of the metal, we’ll still be a long way off from a true gold standard.

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China gold reserves too small, adviser says

Households and businesses purchased more than 300 tons of the metal last year, and that trend looks to continue in 2011. If the government jumps in, everyday gold buyers may find themselves unable to afford gold.

A widely respected economist in China, Li Yining of Peking University, has joined a chorus of advisers urging the Chinese government to increase the country’s gold reserves as a hedge against inflation of foreign currencies.

“China should increase its gold reserves appropriately, and China must take every chance to buy, especially when gold prices fall,” Li told China’s Xinhua news agency.

At least one government official argues that building up China’s gold reserves would drive gold prices too high for everyday consumers.

“The gold price shot up last year, and surging gold prices have forced Chinese people to pay more as there is strong demand for gold for those getting married and other events,” Yi Gang, head of the State Administration of Foreign Exchange, said recently.

China’s appetite for gold is large. Households and businesses purchased more than 300 tons of the metal last year, and that trend looks to continue in 2011. If the government jumps in, everyday gold buyers may find themselves unable to afford gold.

Still, China’s official gold holdings are much smaller than many other countries – amounting to just 1.7 percent of its foreign reserves, according to CNBC. With a population of 1.34 billion, that equates to about $37.45 worth of gold per person for a total of $50.19 billion. The U.S. holds nearly five times as much bullion.

Here’s a break-down of the Top 10 largest gold reserves in the world (click for larger view):

After falling rapidly in January, gold prices have spiked in the past six weeks in the face of turmoil in the Middle East and Northern Africa. All told, the metal’s up 3 percent since the start of the year. If the Chinese government starts buying in earnest again this year, expect prices to climb even higher.

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