London, England

I have to admit I’m a little uncomfortable by the growing chorus of Gold-Bugs lately, especially amid this powerful run in the gold price since August. Though a pullback is imminent, it will only serve as yet another buying opportunity on the road to $2,500 or $3,000 an ounce in this bull market.

So in times like this when the spot price is acting like a rampaging bull, I remind myself why I’m invested in gold bullion.

I’ve been bullish on gold since 2000 and remain a devoted Gold-Bug for numerous reasons over the last several years, ranging from the ongoing destruction of credit, growing sovereign debt crises since Dubai exploded last year and new efforts by major central banks to resume Quantitative Easing or QE II to purchase assets.

Increasingly, I have very little confidence in paper money or the central banks that print this stuff because I believe they’ve lost control since 2008.

The number one reason why I believe gold and silver will continue to appreciate over the next 24-36 months is primarily because of the flawed global exchange-rate mechanism. The currency system as we know it no longer functions properly. At some point in the future, gold and possibly other commodities will form a larger basket of a new global exchange-rate grid.

The current mechanism is faltering, growing more dangerous by the day as global traders laced with derivatives threaten the financial system with leveraged bets on volatile and indebted currencies. This has already been happening since 2007 as the credit crisis has spread from the United States to Europe threatening sovereign nations like Dubai, Greece and Ireland whose debt levels are enormous. This will spread to other EU nations and, eventually, hit the United States and, possibly, Japan, destabilizing the financial system and drawing safe-haven flows into gold.

Combined with my number two reason – supplies turning into net deficit — you have a recipe for continued gains mainly in gold and, to a lesser extent, silver.

Since the demise of the Bretton Woods exchange rate agreement in August 1971, global currencies have suffered a multitude of embarrassing devaluations, including the dollar. Every region has been mauled by colossal currency devaluations in the post-WW II period; Latin America literally saw its currencies crumble in the inflation-wrought 1970s and 1980s followed by a total wipe-out of currency values across most of Asia in the late 1990s. Russia devalued and crashed in 1998 while many other units plunged in value over the last 35 years – Turkey, South Africa, Iceland, Scandinavia, India, Pakistan, Sri Lanka, the British pound, the Italian lira, the Balkan currencies and, of course, the infamous U.S. dollar — the world’s reserve currency.

Since 1971, the American dollar has lost a spectacular 90% of its purchasing power vis-à-vis the world’s hardest currencies, including the Swiss franc and the German deutschemark, prior to the advent of the Euro in 1999. And even under former Federal Reserve Chairman, Alan Greenspan – revered for his staunch inflation-fighting track record from 1987 to 2006, the dollar plunged more than 50% during his 19-year tenure. Not exactly what I would call a great Fed Chairman.

I suspect the next phase of the credit crisis will be its worst, perhaps destabilizing U.S. Treasury markets or, possibly, other sovereign nations in Europe or Japan. The currency mechanism we live with now is no longer viable and must be replaced. The sooner, the better.