Gold to Break Out Above Its 26-Year High

Gold bullion prices are reaching their highest level in 12 months’ time, pushing the prices of quality gold stocks up with them.

I’ve been bullish about gold for several years for reasons I’ve outlined in this column many times. A slowing U.S. economy and too much American debt are factors working to push down the value of the U.S. dollar against other world currencies. And when that happens, investors turn to gold as their alternative “secure” currency.

On Friday, the U.S. dollar fell to a two-year low against the euro. Sure, analysts might tell us it looks like the European economy might do better this year than the U.S. economy, thus pushing the value of the euro higher. But the problems behind the value of greenback are much deeper.

The cost of the wars in Iraq and Afghanistan and the cost of homeland security continue to take a toll on U.S. government debt. With many consumers now reeling from the subprime lending fallout, debt is becoming a severe problem for America.

The answer? Keep printing more dollars, keep borrowing more money… The trade deficit, especially with China, hasn’t helped. A foreign country getting close to holding one trillion U.S. dollars… this would have been unheard of just 10 years ago.

Like any item, too much supply causes prices to decline. And that’s exactly what is happening with the U.S. dollar. The world is awash in dollars. Now, investors and foreign governments are starting to ask the question: Is there anything behind that dollar backing it up?

If we look at other world currencies, there is no real “safe” alternative to the greenback. Sure, investors can look to the euro and yen, but both have their problems. Gold is the only real alternative to the U.S. dollar.

Gold bullion reached US$689.90 per ounce on Friday, only 6% below gold’s 26-year price high of $732 an ounce reached last year. I expect gold to move decisively above its 26-year high soon. When that happens, the stock prices of quality gold stocks will move to new record highs with the metal.