As a result, gold has started to shine again as a stable source of value at a time when the dollar and other commodities – like oil and copper – have fallen hard. The spot price of gold has climbed above $870 an ounce on the New York Mercantile Exchange, up about 20% from its October lows.

Gold has been on roller coaster ride in 2008, moving from its all time high of $1035 in March, to as low as $681 an ounce. Some of that decline occurred during the recent stock market plunge. Many investors were forced to liquidate profitable gold positions in order to raise money to cover their paper losses.

Its decline was then accelerated by the recent onslaught of financial bailouts, as many investors held a preference for liquidity and safety in the form of cash holdings guaranteed by the U.S. government.  That was reflected in the skyrocketing prices of government bonds and investments in government-backed banks, which also lowered yields.

But with the Fed’s recent decision to cut its target interest rate to a range of 0% to 0.25%, the dollar has suffered a significant decline. Suddenly, foreign investors who were scooping up dollars have cut back on their flight to safety, knocking the dollar index (NYBOT: DX) down 10% in the last month.  The index reflects the dollar’s value against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc.

The Fed’s interest rate cut may also have given gold a comparative boost in the eyes of investors. Gold, which never pays interest, suddenly doesn’t look so bad when compared to T-bills, which also are paying zero interest lately.

Volatility has risen this year compared to previous years, and the last few months have been the most volatile of all – an indication of investor ambivalence. But any uncertainty about the increasing price of gold may have been waylaid by the Fed’s recent rate cut and its dampening effect on the dollar and Treasuries.

Consequently, don’t expect this rally to be short-lived. As we pointed out in our 2009 Outlook Report on Gold, the fundamentals in the market hold the promise of more gains ahead.

It appears unlikely central bankers around the world will stop stimulating economies, printing money and doing whatever it takes until growth and confidence are restored – even if the cost is rampant inflation.

Consider these wild card inflation indicators that Money Morning Contributing Editor Martin Hutchinson believes will carry gold prices to $1,500 an ounce by the end of 2009:

• Over $7 trillion of freshly minted U.S. dollars are now in circulation with the aim of saving the global financial system.
• The incoming Obama administration has promised another $1 trillion or so stimulus package is on the way.
• It’s likely the Fed’s interest rate cuts will soon be followed by central banks around the world.

These economic stimuli are designed to do one thing – get the consumer spending again.

The bailout of the banks was the first step, but the banks are still keeping a tight rein on credit. Now the government is trying to get easily available, cheap money back into the hands of the consumer by running the printing presses around the clock.

“The government is pumping money in so many banks, and that money has to come out somewhere,” said Hutchinson.

Some of that money will “come out” into the economy in the form of higher stock prices. That will make consumers wealthier, and could give them more confidence in the economy. More confidence means more spending. As that happens, prices for goods should begin ticking upward, giving another booster shot to gold prices.

For instance some of that money is already going into gold bars and coins. In fact, the U.S. Mint was forced to suspend sales of the popular American Eagle and Buffalo gold coins for extended periods twice in the last year. The mint was unable to secure enough gold blanks from suppliers to match demand.

“I’ve never seen a case where demand was so high and supply was so short,” Chicago coin dealer Harlan Berk told the Associated Press.

With massive amounts of capital floating around, the time it takes to re-inflate the global economy will be far shorter than most analysts expect. Governments fear deflation more than anything.  It appears they will only fight inflation when they are assured they have won the first battle, which is growth at any cost.

When inflation kicks in, the dollar’s buying power will suffer long-term.  In fact, we expect a decline in all the world’s paper money, over time.  Historically, investors in gold have prospered during periods of weakening fiat currencies.

That leaves gold as a bright light in the investment world, making it an odds-on favorite to open a new leg of a long-term uptrend

Gold Bugs Have Fed to Thank for Recent Rally

Gold demand has in fact exploded, and not just here and there. Everywhere. Around the world, customers have been queuing up to strip coin shops’ shelves bare. Mints have been running 24/7 and still have been forced to ration coin shipments to their dealers. ETF vaults are bulging.

Now, the World Gold Council has confirmed the trend with hard numbers for the third quarter of this year. In a page-and-a-half press release summarizing 3Q2008 activity, the WGC had to use the word “record” ten times. Some highlights:

• Dollar demand for gold in Q3 was a record US$32 billion, 45% higher than the previous record, set in 2Q2008.
• Identifiable investment demand, which incorporates demand for gold through exchange-traded funds (ETFs), bars and coins, rose to $10.7 billion (12.3 million ounces), double year-earlier levels.
• Retail investment demand rose 121% to 7.5 million ounces, with strong bar and coin buying in the Swiss, German, and U.S. markets. Europe as a whole saw an all-time record 1.64 million ounces of bar and coin buying. France became a net investor in gold for the first time since the early 1980s.
• Gold ETFs posted a record quarterly inflow of 4.8 million ounces in Q3. After the collapse of Lehman Brothers in late September, ETF inflows shot higher by an unprecedented 3.6 million ounces in only five days.
• Demand for gold jewelry hit a record $18 billion. Leading the way was India, which witnessed a rise of 65% in dollar value (1.3 million ounces) compared with 3Q2007. The Middle East, Indonesia, and China all experienced increases of more than 40% in value or 10% in weight, year over year.

At the same time that demand is setting records, supply has been unable to keep pace, falling 9.7% from year-earlier levels, the WGC reported. The drop was largely due to inaction on the part of central banks, which have increasingly shut their vault doors.

Heavy demand, declining supply… small wonder that gold prices have remained near record highs in most of the world’s currencies; that dealers have been marking up coins by 10% or even 15% (when they can get them); and that one-ounce coins still fetch bids close to $1,000 on eBay.

When will the spot price in U.S. dollars, which is set by the futures market, catch up? No one knows. But it will.

The world’s hunger for gold will only grow into a future awash in fiat currency. Gold is the ultimate and, at day’s end, the only safe haven from the kind of currency destruction that is being visited upon the dollar, the euro, even the renminbi, as governments everywhere desperately try to stave off a deflationary depression the only way they know how: by turning on the printing press.

We are in a period of intense monetary inflation. It will be followed, inevitably, by a long period of price inflation. People will be desperate to preserve the buying power of their dollars, euros, etc., and they will turn to the one thing capable of doing just that. Gold.

As gold rises, it will lift the shares of selected mining companies with it. The ones that prosper the most will be those that have positioned themselves to survive the credit crisis — by stockpiling cash, keeping production costs down, and locking up borrowed money on favorable terms.

Companies that have failed to do this will go under, unable to get credit in a frozen market. That will both diminish competition and further curb supply, and those that properly planned ahead will rake in enormous profits as gold goes through the roof. Or more likely, as Casey Research founder Doug Casey puts it, gold “heads to the moon.”

But which are the companies poised to profit the most? The ones we cover in our monthly newsletter for conservative investors, BIG GOLD.

We are dedicated to bringing you the information that will allow you profitably to pick your way through the present economic minefield. We search the world of producing gold miners, to find the best of the best. We pinpoint the investments that will not only hold on through a market downturn, but will rebound spectacularly as the commodities market recovers, which it must.

In addition, we bring subscribers the best ways to invest in physical gold, including where to find coins and bars at affordable prices in times of extreme scarcity — like right now, when mints are not minting, most dealers are out of stock, and those still taking orders are charging exorbitant premiums.

While we specialize in producing companies, we also cover such alternative gold investments as ETFs, mutual funds, royalty companies, and closed-end funds. We strive to find what’s best for you. And we answer your specific questions, each month in our BIG GOLD Responds section.

The elaborate world financial structure that has been erected over the past two decades created a humongous bubble that has now popped. What will come in the aftermath of this cataclysm cannot be foreseen, but it will be different. One thing is for certain, though, gold has been money, in all times and places, for thousands of years. The people of the world are already returning to it as the sole store of value, and that’s a trend that will accelerate in the coming years. You can count on it.

Learn how to make the trend your friend with a 3-month, no-risk subscription to BIG GOLD… and as an added bonus, receive our hot-off-the-press special report “The Crisis in Pictures” absolutely FREE of charge. Click here to continue…

Source: Gold Buyers Smash Records