Gold broke the $1600 barrier in intra-day trading this morning—twice. The debt ceiling drama is only one reason among many.

What happened to gold and silver

On Friday, gold closed at $1589.80, up only eighty cents an ounce at the New York Commodity Exchange. Then this morning it broke another ceiling at $1600. At first it fell back abruptly, at 8:00 this morning (Eastern time). Then, at about 10:30, it broke above $1600 again and is still rising at this hour (11:07 a.m.).

Silver is rising, too, now up $1.54 per ounce and well above $40 per ounce.

What’s driving these metals higher

Representative Ron Paul (R-TX-14), a consistent advocate for a return to gold as everyday money

Gold and silver are rising for at least two reasons. The immediate reason is the debt ceiling talks. They are going nowhere. Investors know it. They are looking for a store of value. This had to happen sooner or later.

The long-term reason is that central banks, as a group, are buying gold, and buying it faster than ever. Standard Chartered Plc guesses that gold will reach $2000 an ounce by 2014, and $5000 an ounce by 2020. The Chinese central bank (and, incredibly enough, ordinary Chinese men-on-the-street) will buy gold faster than Chinese gold miners can dig it out of the ground. That might be happening already. Other central banks will likely do the same.

Prices for all physical, hold-in-your-hand things are going up. Countries are debasing their currencies everywhere. So everyone is looking for a solid store of value.

Is this the big rally?

That’s hard to tell. If the US government does something sensible about its massive debt, gold might fall back once more. Gold will still rise by year’s end. Too many people want it, and will still want it, for gold not to rise in price.

But the government might not do the sensible thing. Worse, Standard and Poor’s might downgrade US Treasury paper, debt ceiling rise or no, if the government cannot cut its debt enough. (“Enough” is $4 trillion over ten years.) If that happens, gold will rally now, not later.

Recommendations

Gold: Buy

Silver: Buy

Featured image: gold coins from a pirate’s treasure.

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