How to ignore the FX market noise and see what your local currency is doing vs. gold...

UH-OH....What's this? asks Dan Denning in Melbourne for The Daily Reckoning's Australian edition.

Armed robbers have stolen 100kg of gold from an Australian-owned gold mine in Tanzania. That's about $4.4 million in gold. Resolute Mining (ASX:RSG) says the robbers overpowered its guards at the mine about 750km from the capital of Dar es Salaam.

Notice they didn't rob a bank, at least not in the conventional sense. Besides, there's no point in robbing a normal bank if the government is going to systematically ruin the money anyway.

Yesterday the US-Dollar Gold Price jumped $14.10 to trade back over $900 again. It was the first time old yeller has traded there in three weeks. The World Gold Council meantime reported that inflows of gold into exchange traded funds were 456 tonnes for the first quarter of the year. That compared to 321 tonnes for all of last year.

ETF demand for gold – effectively hoarding metal but not actually owning it directly – is definitely one of the short-term drivers of the Gold Price. Gold is far more investable to retail and institutional investors than it was five years ago. Of course, owning shares in a gold ETF is not the same thing as owning Gold Bullion or Gold Coins. But as a driver of the market, there's no doubt investment demand is a big contributing factor.

Of course the big question for Aussie investors is NOT what the US price is doing, but what the Aussie Gold Price is doing. It bounced off $1,200 on April 17th and is up about $60 since then. That's down from the 52-week high above $1,500. But the question we hear most often is what happens to the Aussie price if the US Dollar weakens and the Aussie strengthens?

The simplest argument we can make is that the Aussie Gold Price is going to be driven primarily by the bull market in gold and not weakness in the Aussie Dollar on the currency market. This can get confusing. But the thing to remember – whether you agree with our take is another question – is that we continue to forecast competitive devaluations in global currencies. This is bullish for gold in any currency.

Here in Australia, it's true the government has a good credit rating and that it's begun its borrowing binge from a position of relative fiscal strength. But we have a hard time imagining that recurring fiscal deficits and more stimulus plans are bullish for the Aussie Dollar.

What would be bullish for the Aussie Dollar – and thus negative for the Aussie Gold Price – is a rebound in the Aussie economy or a big increase in Aussie interest rates that attracted foreign capital back to Australia. We don't expect either of those things to happen, given how stingy capital flows seem to be getting. But if either of both happened, it would cap the rise in gold in Aussie terms

Mostly we would tell readers that the month-to-month variations in the Gold Price have no real bearing on our long-term forecast. If you think the current financial system is a lot less stable than it appears, you should have some portion of your assets in Gold Bullion or coins. Gold Mining shares give you extra risk (management, input cost, capital market) but also – potentially – extra leverage on the rising price.

All that said, please be sure that gold is NOT a fail-safe investment. The deflationists argue that the collapse of the credit bubble cannot be prevented by fiscal stimulus or monetary excess. They argue that as trillions in credit and phony money drain from the global economy, all asset prices (including gold) will fall lower. They could well be right.

As we've said time and again, the time-tested preference for governments is to inflate their way out of debts. This has always been good for gold. It will be again. But remember, gold is a way to store and preserve your wealth until you can convert into something that's an actual medium of exchange.

It's possible, of course, that people will begin using gold and silver as a medium of exchange for large transactions. But for smaller ones? Who knows? In post-Soviet Russia, vodka and petrol became a kind of currency. You could barter with them to get what you needed.

The point is that what people have used as a day-to-day medium of exchange has changed all over the world over time, depending on the benefits of that medium (such as its liquidity, stability, convenience, durability, ease of storage and non-counterfeit features). What's also true is that ownership of physical gold has been one way to store a portion of your abstract wealth in tangible form until you convert it into something else, such as business investment or goods and services.

If you think it's crazy or impossible that we could ever get back to a world where people have more confidence in gold in the safe than in money in the bank, fair enough. But just remember, this whole experiment with fiat money is not even one hundred years old. Just because it's all we're used to doesn't negate the fact that for 5,000 years of human history, people have been using gold as money.