Golden Opportunity?

Reader H_Baskerville asked us the following question after reading our blog post this morning mentioning India's big gold purchases in recent weeks:

Can you talk more about why India would do this? What does it mean? Does this impact Treasury bond sales? Will other nations (BRIC) follow?

In short, big gold purchases from India or any other investor, and the resulting rise in the price of gold, could be the beginning of a long-term vote of "no confidence" in the dollar and the U.S. Federal Reserve. It certainly marks the strongest indication yet that some foreign governments are turning away from the U.S. dollar as the world's reserve currency.

Gold prices jumped to nearly $1100 an ounce this week and prices are now up 22.7% for the year, headed for a ninth straight annual increase.

Like India, central banks and other investors across the globe are increasing their bullion reserves. In the last year, China has increased its gold holdings, by weight, by 75.69%, Russia by 18.78%, the Philippines by 18.50% and Mexico by 108.91%.

Historically, U.S. Treasury bills are considered to be one of the world's safest investments. But growing insecurity about the long term health of the U.S. economy and recent weakness in the dollar benefits gold, which is often used as an alternative asset hedge to a depreciating dollar.

What if investors are moving away from the dollar for good? Foreigners own a little more than half of publicly-held U.S. government securities, according to the Treasury Department. So if these foreigners - both central banks and private investors - decided to give their Treasury portfolio a heave-ho, it could leave to a devaluation of the greenback and rising interest rates, and the cost of borrowing for consumers and businesses could rise. That would be bad for economic growth.

That's not likely to happen soon. But if gold's ascendency is an early sign of the future, it may be time to buckle up.