MarketWatch’s Lynn: 3 Reasons Why Gold Is Headed Higher

Friday, 26 Apr 2013 08:08 AM

By Dan Weil

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Gold’s recent slump, which took it to a two-year low last Monday, will prove to be just a temporary blip, according to MarketWatch columnist Matthew Lynn.

“If you step back from the day-to-day noise, gold is still a long-term bull market,” he writes. Gold has risen for the last 12 years.

Three major economic factors will drive it higher from here, Lynn says.

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“First, the euro is the most dysfunctional currency system ever created, locking what remains the world’s largest economic block into permanent depression,” he states.

Europe’s woes benefit gold, because they will lead central banks around the world to continue their quantitative easing (QE), Lynn explains. “More QE is good for the metal.”

Second is the global debt crisis. Governments and consumers worldwide are overleveraged, he maintains. “It will take years to bring that down — and may prove impossible.”

That benefits gold because it means central banks can’t raise interest rates, Lynn notes. “It is impossible to put them up without bankrupting homeowners and the government.”

Third, “the dollar is in long-term decline as the world’s reserve currency,” he writes.

“The rest of the world has grown far richer, and the U.S. is not the dominant economy it once was.”

The dollar’s drop will push central banks to purchase gold as an alternative, Lynn adds.

Already, gold has rebounded 6.9 percent from last Monday’s nadir to trade at $1,449 an ounce Thursday.

“The bounce in price-sensitive physical demand, especially in the emerging world, is impressive and has lifted prices,” Howard Wen, an analyst at HSBC Securities, wrote in a commentary obtained by Bloomberg. “[Exchange-traded fund] selling remains the main obstacle to a more vigorous recovery.”

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