Perhaps the fundamental fear behind every gold investment is that the paper money being gotten rid of could become worthless. In theory (probably in actuality), that fear rests with any currency not redeemable in gold or silver, which means all the world’s currencies. No world currency, not even the fabled Swiss franc can be redeemed for gold or silver at the Swiss National Bank, which is Switzerland’s central bank, the equivalent of the U.S. Federal Reserve Bank.

The destruction of paper money usually comes about after the abandonment of the gold standard and the institution of fiat money, which is money by governmental decree. The dollar is money by decree, “all debts, public and private.” However, in many cases, one fiat currency is introduced to replace another fiat currency. Brazil is famous for doing that.

Before moving on to the problems faced by the Zimbabwean gold miners, I should note that since the Bretton Woods Agreement of 1944, no country has been on the gold standard. The Bretton Woods Agreement established a gold exchange standard, under which the world’s currencies were redeemable in dollars, which were redeemable in gold. Although under the Agreement, currencies’ values were fixed relative to gold, central banks that were presented their nations’ currencies for redemption actually gave the redeemer dollars.

Zimbabwe is an economic cesspool, with government regulations of nearly every facet of economic activity. One control in Zimbabwe is that all mined gold is to be sold to the Zimbabwean central bank, the Reserve Bank of Zimbabwe (RBZ).

According to one source, gold miners are meant to be paid 35% of their production at the highly overvalued local currency and the remainder in US dollars. The RBZ pays partially in U.S. dollars because the gold mining companies need to buy equipment in foreign markets to keep operating. There is no market for Zimbabwean dollars outside Zimbabwe. Outside Zimbabwe, Zim dollars are paper.

While the official policy is for the RBZ to pay partially in U.S. dollars, the RBZ now has no U.S. dollars, or any other foreign currencies, and the gold mining companies are receiving only Zim dollars. Because Zim dollars cannot be spent outside Zimbabwe, the mining companies are unable to replace worn out equipment.

As a result, “Zimbabwe’s once proud and big gold sector could be set for a further decline,” says Tawanda Karombo, posting an article from Harare, the capital of Zimbabwe. Zimbabwe produced seven tons of gold last year compared to 11 tons in 2006, their lowest level in 90 years.

Although Zimbabwe’s gold production has never rivaled that of neighbor South Africa, for nearly a hundred years it has been a solid gold producer. Now, Zimbabwe’s gold production looks set to grind to a halt, which will be positive for gold investing.

The last few posts were about silver because that’s the way the news fell. Now, we have a plethora of articles about gold, some worth reading and one worth listening to if you prefer not to read.

ANZ Australian Economics Weekly says gold prices may “firm this week.” With gold having hit $930 Wednesday morning, I bet ANZ now wishes they had predicted rising gold prices this week. Analysts love to be right about predicting short-term price moves. Accurate predictions sell subscriptions.

Although ANZ advised that gold could firm this week because of surging oil prices, the analysis warned that concerns about oil prices were “re-setting” global inflation concerns, “which should trigger a catch-up rally in gold (compared to oil).” I guess that’s what we’re seeing with gold up $65 from this time last week.

Nevertheless, ANZ cautioned, “We expect gold prices to drift lower over the coming months, with increasing signs that the fall in the USD is near the trough.” Seasonally, the summer is the low period for gold and silver prices, so there remains the possibility that “gold prices may drift lower over the coming months.” Still, past summers have not had the dollar in so much trouble and real fears that the Bush administration may bomb Iran’s nuclear research facilities.

Mineweb.com reviewed ANZ’s analysis, for those who want to read it.

Meanwhile, Kevin McArthur, President and CEO of Goldcorp, a major gold mining company, said Tuesday that he is certain that investors will again see four-digit gold prices this year with the potential to “go well into the four digits.” Four-digit means above $1,000, and I guess that “well into the four digits” means something like $3,000 or $4,000 gold. McArthur didn’t give a time frame, but I don’t think he was predicting $3,000 or $4,000 gold this year.

I think that $3,000 - $4,000 gold is a real possibility, out there four to five years. A widened war in the Middle East, and it may not take four or five years.

Mineweb.com ran an article on McArthur’s comments, but the article is mostly about “greens” dominating the conference where McArthur made his predictions.

The third article, which you can listen to instead of read if you prefer, is titled Is the dollar doomed? and is more about the dollar than about gold. Because you can’t talk about a sinking dollar without talking about gold (if you’re giving an honest appraisal of the situation), the article really is quite good. Except where the speaker says, “Well, we don’t actually need a government run gold standard anymore.” Here, he covers himself by saying that there are places where individuals interested in investing in gold can go.

When a government is not on the gold standard, the door is wide open for inflation, exactly what we’ve had in the United States since 1971 when President Richard Nixon closed the gold window.

Meanwhile, resourceinvestor.com slapped gold around a little with an article titled Gold Demand Drops to Five-Year Low in Q1. The article, based on a GFMS study for the World Gold Council, noted reduced demand for gold, with the blame laid at the feet of higher gold prices. In India, for decades the biggest buyer of gold, demand shrank.

Here’ how resourceinvestor.com summed it up:

Gold demand in India, the world’s largest physical bullion consumer, was most severely affected by the movement in the gold price, falling 50% to 102.1 tonnes in Q1. Jewellery and investment demand, at 71.1 tonnes and 31.0 tonnes respectively, were half the levels of the correspondent quarter last year.

In almost an after thought, the resourceinvestor.com article noted:

In marked contrast to India, demand in China grew by 15% to 101.7 tonnes, with both jewellery and investment demand increasing during the first quarter as continued economic strength allowed consumers to increase their purchases regardless of the rising price. Jewellery demand rose 9% to 86.6 tonnes and investment demand surged 63% to 15.1 tonnes.

Somewhere a news outlet should broadcast that China is about to replace India as the biggest buyer of gold. Further, with China’s increasing prosperity and its people freer to buy gold, China’s impact on the gold market should be huge in the years ahead. Wonder why only the perpetual bulls seem to know what’s going on in China when it comes to gold?

Resourceinvestor.com titled a recent article about ETF silver holdings thusly:

London-Listed Silver ETF Unloading Holdings

A title with a negative connotation. However, the article itself was rather bullish on silver.

On reading the article, you will learn that although the small London-based ETF had about 3.5 million ounces (99 tons) worth of silver redemptions from February, the larger U.S.-based iShares saw an increase in holdings of 563 tons since February, for a net increase of 464 tons (nearly 15 million ounces). While the smaller ETF now holds a mere 285 tons, iShares holds 5,928 tons.

I found it interesting that in choosing the title for the article, the writer emphasized the action in the smaller fund. The writer also chose to quote two industry players who have negative outlooks for silver.

However, to his credit, the writer let Jeffrey Christian, CEO of CPM Group, counter. Christian said he did not agree with this contention that silver’s fundamentals are turning bearish.

In its 2008 Silver Yearbook, CPM Group predicted a third consecutive year of net buying by investors, with them buying a projected 74.9 million ounces of silver. In 2008, total supply is projected to increase 3.9% to 815.1 million ounces, while fabrication demand will rise 2.2% to 740.2 million ounces.

The difference between the 815.1 million-ounce supply and the 740.2 million-ounce industrial demand will be picked up, according to CPM Group, by investors. If investors buy more than 74.9 million ounces, we have upward pressure on the price of silver.

Additionally, the article discusses the differences in thinking about silver between Europeans and peoples in other part of the world. Europeans are not big fans of silver; however, North Americans, Indians, Chinese and Middle Easterners are.

All in all, the article’s an informative read about silver. Still, I wonder why writers so often attempt negative spins on silver when the fundamentals for investing in silver are so positive. For an example, see my April 30 post Reuters attempts hatchet job on silver.

Releasing a second study in four years, the Commodities Futures Trading Commission (CFTC) denies that the major bullion houses are or have manipulated the price of silver. Basically, the CFTC study said that price of silver is not and has not been manipulated because the price of silver has risen substantially over the last few years.

The study found that “. . . silver cash and futures prices have risen dramatically between 2005 and 2007, with silver outperforming the gold, platinum and palladium markets, suggesting that silver future prices are not depressed relative to other metals prices.”

The study’s position is plausible. In early 2005, silver was trading below $10. In March this year, it topped $21. In 2003, silver was trading below $5. Still, in March 2008 it topped $21. So, how could there be a manipulation of the price of silver, the study asks.

Further, those that allege price manipulation also assert that the actions of the major bullion houses have depressed the price of silver. Here, the CFTC says that the facts simply prove otherwise, and the CFTC’s position seems reasonable.

I am not here going to enter the debate as to whether the large commercials (LCs) have manipulated or are manipulating the price of silver. Others have studied the situation extensively and readily make their opinions known.

What is will say is that in the end market forces will win out. When silver was $5, I believed that the large short positions in silver (and gold) depressed prices, but I was not concerned.

I firmly believed that in time market forces would win. The fundamentals were there for a bull market in silver. Actually, when silver was below $6, what I said was that the silver was a “gift,” thanks to the LCs large short positions. Now, investors at the $5 level have four fold price increases.

Now, regardless of what the LCs do, I believe that investing in silver would be a good move. Maybe the LCs, with their present large short positions, will see lower silver prices in the short-term, and therefore reap large profits, but in the long-run market forces will push the price of silver much higher.

GFMS Ltd., a metal consultancy headquartered in London, says that silver will climb back to $20 this year, primarily because of investor demand. The prediction came with the release of Silver Institute’s annual World Silver Survey, which GFMS compiles. GFMS, formerly known as Gold Fields Minerals Services, publishes the one of the two respected annual reviews of the silver market. CPM Group, New York City, produces the other.

GFMS bills itself as “the world’s foremost precious metals consultancy” and claims contacts around the world. GFMS also boasts of having “a research team of fifteen full-time analysts that comprises qualified and experienced economists and geologists; while two consultants contribute insights on important regional markets.” Because of GFMS’ standing among professionals, this prediction will receive much publicity and, perhaps, become self-fulfilling.

Based on my observations of market activity at CMIGS, silver back to $20 this year seems reasonable. Although sellers fed the market from about $8 up until silver topped $20 in March, few sellers are around now. Actually, selling dried up before silver hit $20, and with the drawback below $17 sellers have just about vacated the market.

Meanwhile, silver buyers, although many express optimism of $30 to $40 silver within a year or two, seem content to be long-term investors, expressing a willingness to hold for much longer that two or three years. Many silver buyers are new to precious metals investing, having been driven by concerns about the dollar, not because of silver fundamentals.

New buyers often talk of “passing something real” to their heirs. Silver purchased by such investors is said to be “in strong hands.” They are not likely to turn their silver for small, quick profits.

And, anyone with any knowledge at all of the financial state of affairs of the U.S. government knows that the causes of the problems with the dollar will not be solved anytime soon.

Further, silver is becoming a much more accepted investment than it was years ago. Many establishment firms no longer denigrate silver as they used to. When silver becomes a mainstream investment, the price could skyrocket.

Resourceinvestor.com published a review of World Silver Survey 2008. The Survey itself costs $225. Of further interest to investors, the Silver Institute has on its website a free summary of the 2007 Survey.