(Editor's note: this is commentary on the prospects for gold prices by the recently launched, UK-based investment firm and wealth advisor, Yellow Capital).

At $1,320 an ounce for gold (as at the time of writing) there is definitely something toxic brewing in the financial world. If gold is money, and a safe-haven (reserve) asset which measures the devaluation of fiat money, then at its current rate of appreciation something “stinks”.

I believe that recently the gold price has  not only been driven by the competitive global currency devaluation by governments, but also the fact that the Central Bank Gold Agreement (The Washington Agreement) which ended in September 2008 (at the time of the credit crisis) has lead to central banks becoming net purchasers of gold bullion. The reason for their buying includes the heightened currency instability, huge sovereign deficits and the all-time-high gold price.

I also believe that central banks are also now competing for physical bullion with sovereign wealth funds via or perhaps with ETFs and ETFs themselves (the general public) directly. ETFs have swollen all around the world including the US, UK, South Africa, Europe and Australia since they were launched (which to my mind proves that gold is still considered real money and carries what many pundits call “gold’s stateless money franchise”). This means gold is considered the ultimate medium of exchange in any country or state rather than paper money being a sovereign right to legal tender.

This redirection of gold away from central banks is what a well known fund manager once called “the privatization of central bank gold reserves”.

Central banks still hold roughly 30 per cent of all the gold stock in the world. Therefore, should they start off-loading their gold reserves as they did in the 1980’s it would create an over-supply and a severe fall in price. For people with gold in their portfolio this is possibly the worst short term scenario, it is highly unlikely the central banks will sell their gold while the price is soaring and looking as if it is set to continue to rise.

I think the balance of power is shifting away, and in time to come, I believe governments and central banks will not be in a position to “fool all the people all the time” by printing money or simply creating credit out of thin air. All that money creation does is to raise the price level of goods and services which effectively makes the public poorer.  This system cannot continue without larger financial collapses, world economic instability and the disequilibrium that continues to perpetuate poverty and unemployment.

Being a staunch believer in a return to a system where our paper money is backed by a physical metal either gold or silver, I cannot see a return to the classic gold standard, however, there may be a scenario where we return to a gold exchange standard.

Under this system gold would once again become the numerator in the international monetary system and foreign treasuries would retain the right to oblige other countries, and in particular the US, to settle its accounts in gold rather than in dollars. This is what the French President Charles de Gaulle called the US’s “exorbitant privilege” of being so fortunate as to settle its foreign debts in dollars (that it merely prints at will). This is what has come to be known as the “deficit without tears”, and that the dollar is America’s currency and everyone else’s problem.

My fear is that the majority of wealth managers, family offices and other investment managers believe that the dollar is still “as good as gold” and continue to purchase low yielding US T-Bills and Bonds rather than gold or gold-related investments as a safe haven investment to park client money.

Gold is money and the underlying asset of paper money which is a derivative of gold. Gold is an insurance against the collapse of paper money, hyperinflation or severe currency devaluation.