Gold rose 1.2% yesterday from oversold levels (silver +0.9%) despite stock markets falling, the dollar strengthening and oil falling for a second day. The rally has continued in Asian and early European trading as equities are again under pressure and gold is again receiving a safe haven bid.

The shadow banking system€™s huge and growing toxic debt (IMF revised upwards their estimates from $2 trillion to over $4 trillion) looks set to impede any progress in fixing the ruptured international financial system. Obviously, this has negative implications for the global economy and may lead to a new Depression. Gold€™s wealth preservation attributes will continue to be sought after as our financial and economic ills look set to be prolonged.

There were some $43 trillion of credit default swaps (at year-end 2007) according to the Bank for International Settlements and total derivatives of over $500 trillion and if only a small percentage of these €œfinancial weapons of mass destruction€ go wrong or are marked down sharply then we will face the horrible vista of a systemic crash which would likely lead to a monetary crisis.

width=459

At the very least we face a severe global recession and the likelihood of severe inflation and stagflation in the coming years (once deflation abates). Soros warned of this yesterday and talked positively about gold which would do well in such a scenario.

Soros said €œthat€™s the fear that drives people into gold.€ Soros wouldn€™t say whether he€™s investing in or owns gold but certainly implied that gold is a safer and good bet. More explicitly, he agreed with the view there€™s a bubble in Treasuries that€™s likely to burst sooner rather than later. If even a very small amount of the capital in the Treasury and bond markets flow into the very small gold market, gold will rise very significantly in the coming months.