I am not preaching to the converted however most if not all readers will know that the US banking system is in trouble as evidenced by QE1, QE2 and now suggestions of QE3. Governments would not offer or provide the monstrous bailouts and deposit guarantees unless this was the case. The European bank has also taken steps to prop up their banking system since 2008, with in excess of US$1.2T in new support in the past 4 months. This is a global phenomenon made necessary due to the gradual debt collapse, a deleveraging process that will persist for many years to come.

This kicking of the can down the road is all about buying time for the financial institutions to repair their balance sheets. This expensive 'time' purchase is considered the only way out by governments that don't want a collapse on their watch and because there has been a very real danger of a total collapse of the entire financial system. The counter party risk of this intricately linked system is highly dangerous thanks to the size of the debt, derivatives, credit default swaps and now the bond market bubble. This is all key to understanding what I am about to say about gold and how it fits.

The debt bubble formed over a long period and this turbocharged growth creating a new modern perception of growth expectations. By the time this bubble matured investors had long forgotten about normal growth trends which were much slower when averaged over time. Now we face the debt collapse. A debt collapse is a slow collapse. It is a death from a thousand cuts and this is what the world faces over the next decade at least.

I do not literally mean 'death' I do not see the world in total collapse, back to the caves, as we have a good chance of muddling through eventually thanks to the efforts of mankind. I remain a realistic optimist. The system as we know it will certainly die in the end however I prefer to hope for an evolution of sorts which will result in a transition period rather than total collapse followed by the rise of a phoenix from the ashes, a genesis that might otherwise need to arise.

At least I can see the train coming whereas many politicians and most investors don't as yet. The 'growth will return' mantra still plays its song despite the headwinds. The combination of the 1) debt bubble and 2) need to keep the music going to avert disaster are both factors we need to weigh up in any investment strategy. The subsequent money printing creates an ideal investment climate for gold. Negative real interest rates are likely to persist while the governments monetize the treasuries. This keeps rates lower and raises the level of cash in the rest of the system - cash that has to find a home. Some asset classes delever and some rise in value as currencies devalue against them.

This is all quite simple to understand however much harder to fix without tearing down centralized power and the debt bubble for a fresh start. The key to maintain your wealth or create wealth from the situation is to work out the direction of the next capital wave. You do this with in-depth research and you need to take note of what the big money is doing.

Now back to the banks - they need to continue the repair of their balance sheets and this can and will take several years yet. They cannot mark all their assets to market and they cannot reclassify many loans as non-performing. This would wreak havoc with their reserve requirements. They are already buying gold because they know that it will become a tier one asset that will also act as a hedge. They know how large the hole is and this is a life boat for them too in my opinion. This will be the biggest game changer for gold since the Chinese started to roll out their gold retail infrastructure.

I am saying that non Central Banks are buying gold as well as the Central Banks. This is in preparation for a upcoming total acceptance of gold as a first tier asset for reserve ratios. Think about the difference this can make to the gold market. Imagine banks in favour of gold rising because it improves the capital adequacy in the system; why that is revolutionary. With many asset classes in decline and the need for the banks to try to repair their balance sheets gold becomes a very special asset class indeed. The Central Banks will be just as happy about a rising gold price in this case, based on demand from their sector as it will act as a stabilization factor in the system. This is the game changer I speak of for gold.

And speaking of gold I see the late 2009 to March 2010 consolidation pattern is now complete in the present time frame. The break out preceded a sharp spike then too and was followed by a triple W shaped consolidation formation. The second low took us predictably back to the 300 day moving average which I wrote about back in 2006. Now we are looking like a breakout is possible at long last.

Now to gold shares and the game changer is clear. The monster and elite funds of the world have begun to appear on the ASX gold stock substantial holder notices. They have been accumulating as the market fell to undervaluation extremes. Now we have an elite Chinese entity Zijin Mining Group Co., Ltd taking a partial control (takeover) play on a highly undervalued Kalgoorlie miner.

Their Chairman announced their plans to set up an overseas financing platform for its foreign assets. They plan to invest as much as 5.5 billion yuan ($880M) per year buying gold mines and companies, mainly overseas he commented according to businessweek.com over the weekend. This is just one interested Chinese buyer soaking up gold miners while sentiment bobs along the lower end of the scale. This heats up the ante for local Funds and institutions as well as the likes of Sprott, Blackrock, Van Eck et al. which have all been appearing as well.

If only mainstream investors saw the same value and understood what is happening the global financial system. As an old friend from the banking system (ex-bond trader and structured products) told me the other day the bankers are looking for vehicles to maintain their standard of living and do not have a lot of options. Yield and preservation of capital are two aims however capital growth is a higher agenda; now that is an interesting story.

The disconnect between the price of gold and the gold stocks has been of intense interest to me over recent years. Are we finally ready to take this sector for a strong rally? That is the burning question. Market leaders on the ASX have done extremely well over the past 12 months and have moved ahead of the rest of the stocks. Only our heavyweight NCM has lagged in this category disappointing the market and dragging down sentiment. I have covered reasons for this in my newsletter.

To view the above phenomenon I present a few charts to finish off. The first chart tracks the ETF in Aussie dollars ASX-GOLD and this is the 5 year picture just to show you what gold is doing in this currency. All charts in this article come with the compliments of Nick Laird at sharelynx.com

As you see we have a well-defined and continuous uptrend for the A$ price of gold. The price gets ahead of itself from time to time yet it has been in this trend since mid-2005. In the top box we have the RSI indicator and I invite you to notice how during each consolidation phase the RSI manages to dip below the 30RSI line in blue. This is the oversold line. Government fiscal policies and Central Bank interventions guarantee this trend will continue until they change tack.

The bank demand for bullion is rising and will continue especially after it is officially accepted as a tier one asset under Basel3. Its rising value will then assist the financial system instead of ringing alarm bells to holding it back will not be a necessary part of monetary policy in the stabilization of the system. Now what about the Australian gold stocks?

Here is the 10 year picture with NCM a weighted dominant part of this index. NCM was $3 at the end of 2001 and had risen to $16 by early 2005. NCM dragged a lagging Australian gold sector - the XGD from 1000 to 3000 over this period. In mid-2005 the whole gold sector took off for a strong run.

This pushed the XGD index to 5000 by March 2006 with NCM leading the way. NCM was almost entirely responsible for the strong run from November 2007 to March 2008 as the rest of the sector frustrated investors.

Then the GFC hit with a vengeance pushing the entire sector to panic lows from October to December. Sentiment was truly decimated and so were the share prices. Many investors have still not recovered. I am pointing out the distortion caused by this weighted index because NCM has been underperforming the new leaders of this sector for the last 14 months. The new leaders were picked up in our Educational Portfolio and which, thanks to the weightings assigned, have allowed us to turn a small profit while the index and NCM suffered.

When you take the NCM weighting out of this index above you will immediately see what I am talking about over the entire 10 year period. Yet some deeply undervalued stocks are now on our radar in this sector even though another group of new early movers has led the way. I would expect that, based on the previous experience that these leaders will continue upwards however; the laggards with promise will play catch up and that indicates greater capital leverage to me.

The index above has found very strong support at 6000 and a new up-leg in gold looks like being the catalyst that combine the interested Funds and investment groups to drive this market upwards at last. So here is the dismal unweighted chart which highlights how undervalued this index is when compared to the beautiful uptrend in the Aussie gold price above.

Does this look like an overbought index to you? The disconnect between this chart and the AUD gold price is pronounced and will have to rebalance at least for a period shortly. I believe it could be longer and stronger than most investors could believe however this will require a watchful eye in case things turn against us. Join us at GoldOz if you wish to get educated more on this fantastic opportunity.

Good trading / investing.