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David Rosenberg is chief strategist for Gluskin Sheff + Associates Inc., and a guest columnist for Globe Investor and Report On Business

After at least a half-dozen runs at the milestone of $1,000 (U.S.) an ounce over the past two years, the price of gold finally managed to roll past that mark a little more than a month ago and yesterday managed to push its way to a new high, closing a shade below $1,085.

What is amazing is that gold, widely considered an asset that correlates highly with market instability and economic uncertainty, pierced the $1,000 level at a time when equity prices were rising to their best levels of the year and just after a pleasant 3.5-per-cent third-quarter U.S. gross domestic product annualized growth performance.

It's not as if anyone can calculate a price-to-earnings ratio for gold. There is no dividend discount model for gold and there is no interest rate or income stream for gold. So what is it exactly that gold bugs see?

Well, gold is a store of value and one that has been durable and reliable for thousands of years. No fiat currency system has outlived gold. Perhaps the better question is what is so sacred about fiat currency - the paper money we all know? The backing of the government printing press; is that the alluring factor?

Investors need to remember that the value of what comes off a printing press isn't set in stone - there are many different factors affecting the value of a country's currency, such as the ability of a country to pay for its debt.

Currently, the pullback in U.S. consumer spending is being replaced either by government spending or incentives to prevent households from modifying their behaviour away from frugality. The pullback in credit demand by the consumer sector is being offset by the Fed's involvement in the mortgage market to ensure that borrowing costs remain very low, and by the U.S. Federal Housing Authority to ensure that down-payment requirements are as close to zero as possible.The behaviour of not just the U.S. government but governments everywhere seems to be that reflationary policies will ultimately be the key toward redressing the private sector deleveraging cycle. There will be a price to pay for that.

Steven Hess, Moody's lead analyst for the United States, has said that "the Aaa rating of the U.S. is not guaranteed. So if they don't get the deficit down in the next three to four years to a sustainable level, then the rating will be in jeopardy."

The prospect of the world's reserve currency not possessing gilt-edged triple-A status adds a cloud of uncertainty to the financial market outlook that belies a 60-per-cent bear market rally in equity prices - the type of flashy rally that Japan experienced no fewer than four times during its post-bubble credit collapse.

Ben Bernanke and company have created nearly $2-trillion of additional U.S. dollars in the past two years even as nominal GDP barely expanded at all.

In the meantime, global gold production has completely stagnated - in fact, it's been stagnant for a decade. And, how long does it normally take for a gold mine to yield production? Answer - five years or so. Does anyone think it takes Helicopter Ben that long to print greenbacks?

The supply side of the gold equation is relatively constant; government-issued paper money is not (especially in the context of a U.S. monetary and fiscal authority that will stop at nothing to revive a cycle of overspending and overborrowing).

We all have a good idea as to how much gold is above ground, and we know how much there is below ground and the marginal cost of pulling the yellow metal out. There is an estimated 165,000 tons of gold above ground, and around 20,000 tons in reserves below. So, nearly 90 per cent of the world's gold supply has been mined and equates to roughly $4.5-trillion.

To put that in perspective, the total amount of U.S. dollars in circulation globally is estimated at $8-trillion, and the total size of the global money supply is around $30-trillion. The size of the world stock market is around $40-trillion. At last count, the total size of the global bond market was north of $80-trillion. The total world derivatives market has been estimated at about $800-trillion, face or nominal value.

Beyond the fact that gold is a hedge against irresponsible fiscal, monetary policies and reckless trade policies, relative to a fiat currency, bonds and equities, it is scarce.

We don't know how many greenbacks the U.S. is going to be printing in the future, but something tells us that a society that is willing to allow zombie banks to survive because it could not stomach another Lehman Brothers-type collapse, is a society that will try to find the easiest way for its population to extricate itself from the credit excesses it took on.

Look at the efforts: court-enforced mortgage re-financings, government-forced loan modifications and foreclosure moratoria by edict.

Gold's allure comes down to scarcity in a world awash with government-minted cash. That is the answer to the question "why gold?" In order to back the amount of currency that is out there right now, gold has the potential to double from here.

Secular bull markets usually last 16 to 18 years and this one is just in year 10, so we are barely past the halfway point in both duration and magnitude in this gold cycle.

David Rosenberg is chief strategist for Gluskin Sheff + Associates Inc. and a guest columnist for the Report on Business

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