28/04/2010 by Philinje.

As I’ve been mentioning for a few weeks, there have been signs that gold is re-gaining its safe haven status. The big difference between now and early 2008, when the stock market tanked and gold shot up to $1033, is that the dollar was falling then. Since the crash in Oct 08, the dollar has risen as a safe haven when risk aversion sentiment increases and in anticipation of the Fed raising rates.

Yesterday the S&P downgrade of Greek bonds to junk was a trigger in another bout of risk aversion that took the wind out of equities. But shortly before the announcement and then during it and afterwards, gold moved strongly through resistance at $1160 and even went as high as $1172. Interestingly, silver declined a bit and was generally choppy at its current high level. Lately silver has been less volatile than gold, which is unusual, and on the whole has not been as susceptible to down moves. Conversely, it didn’t move up as much either yesterday.

In short, yesterday was a clear signal that gold is separating from equities AND the dollar and beginning to shine again as a safe haven. This is not the same as saying that gold is the answer if Europe crashes.  Severe issues in Europe mean that the dollar will strengthen off of Euro weakness and that will hurt commodities and hard assets. But there is some glimmer of hope that gold may not suffer as much. And it strengthens the possibility that we might see a spike in gold in the near future.

Even in Oct 08, gold suffered the least of all commodities, and one would think that was due to its nature as a monetary alternative. Interestingy, gold fell about as much as the dollar rose, whereas silver, oil and all other commodities got crushed. Then it recovered quickly and stayed strong as equities continued on to their low in March 09. Since March 09, most asset classes have risen together and gold achieved a new high in December. That gave the impression that re-flation was fueling gold’s rise along with equities, especially as the dollar began to rise in December and gold fell.

Take a look at these charts of yesterday’s action, courtesy of Ino.com. First, the dollar, then gold, then oil.

Again, yesterday was NOT an all-clear signal for gold. The dollar will benefit as a safe haven and as the counter-balance to a falling Euro. But if gold also acts as a safe haven, then it could be reasonable to expect it would maintain some kind of parallel strength with the dollar. This line of thinking could reduce the risk of significant down moves in gold.

Certainly another factor in the mix is the overwhelmingly popular opinion that the dollar is in trouble too. The US debt looks staggering and the Greek crisis has underlined the sovereign risk of nations like the US and UK. While markets love to move in opposition to popular opinion, meaning the dollar could rally significantly, it is possible that gold will see some panic-driven spikes up, especially since US Treasuries have been quite weak (until yesterday of course, but the trend is down). With signs of a strong recovery in consumer spending and corporate earnings, the anticipation of inflation is increasing.

There is also a lot of chatter about China re-valuing the Yuan, which in essence weakens the dollar and gives China even more power to buy commodities. This may or may not happen any time soon, but markets anticipate such things. And let’s not forget the commercial short position in the Comex is at all-time highs, which leaves open the possibility of a short squeeze (yesterday could have been a small example).

All of this adds a nice pillar of support to gold, and somewhat increases the possibility of a spike up, along the lines of a near-term peak at $1350. This does not mean it will happen. But as time goes by the odds are getting better.

Posted in Gold, Dollar Collapse | Print | No Comments »

17/05/2009 by Philinje.

Here is an excellent aummary of the reasons for gold will do in a deflationary environment:

http://www.gold-eagle.com/editorials_08/brochert051409.html

Posted in Gold, Dollar Collapse, General | Print | No Comments »

15/05/2009 by Philinje.

Intuitively, it seems that all the money printing in the US will have an inflationary effect. At a high level, more dollars means lower dollar value and higher prices of assets. The last article I posted explains how this can still result in a deflationary bias, especially as regards government bonds. And in short, money moving out of bonds will to some extent move into gold, which benefits from lower dollar value as as a physical commodity as well as its perceived value as an alternative to money.

However, there are fierce arguments at present about whether we are facing deflation or inflation, mainly because it seems all the new money is not flowing into the economy. The worry is that we have entered a deflationary spiral, much like the Great Depression, and all the money printing is having no effect on this Kondatrieff Winter, in which the economy just gets sucked into a black hole.

I have read endless articles detailing both sides of the argument and providing precise definitions of inflation vs deflation. These are loaded terms, and commonly abused and misused. Inflation of money results in deflated dollars and higher prices. Often what is called inflation is really the end result, namely higher prices. De-leveraging, as we saw last October, results in spikes down of asset prices that can resemble price deflation, and of course house prices are dropping.

Inflation itself, as opposed to price inflation, is an increase in the money supply. This has been the general trend since early in the 20th century as fractional reserve lending mushroomed. Fractional reserve lending is the ponzi scheme that is the basis of modern economies - some capital is used as the basis for loans that far exceed the value of that capital. There is roughly 10 to 1 leverage, so at any time a bank could have on hand 1/10 the capital it lends out. And that is just the first step of the pyramid.

Today, banks are hoarding new capital in an unprecedented way. So this creates a lot of questions about what will really happen in the economy.

If you want to understand this in depth, I highly recommend this article:

http://www.gold-eagle.com/editorials_08/pollaro051309.html

Posted in Gold, Dollar Collapse, General | Print | No Comments »

12/05/2009 by Philinje.

This article is the single best description I have found of the current situation, which is not just a crisis but an ideology:

http://www.gold-eagle.com/editorials_08/kutyn051109.html

Even if your eyes glaze over when you hear about debates regarding Keynes vs. Mises, this boils it all down to the basics, and answers the question of how gold will do in the case of deflation. Here it is reproduced in its entirety:

Keynes vs. Ludwig von Mises and the Death of Capitalism

John Kutyn

Recently, massive amounts of fiscal and monetary stimulus have been injected into the global economy by governments and their central banks incurring debt. With U.S., Asian, and British economies and financial markets showing some signs of stabilising, there are those that claim that we are witnessing a clear empirical demonstration that Keynesian demand management can stabilise the market economy and protect capitalism from its own excesses.

Keynesian thought claims that financial imbalances and an economic contraction that results from excess debt can be corrected by going even deeper into debt, with central banks now predicting the end of the current recession by the end of 2009.

Countering this view is the Austrian school of economic thought that holds that the problem of excess debt cannot be cured by additional borrowing, but requires a major recession that liquidates unsound investments. Given the extraordinary levels of debt in the global economy, Keynesians correctly point out that such an approach would not only devastate public finances, but that the resulting job losses, bankruptcies, foreclosures, and general loss of living standards would be politically and socially unacceptable.

The key question is whether Keynesian demand management will work, because if it does not, an Austrian style collapse will occur, only from a much higher level of debt with government finances destroyed by the Keynesian approach.

In the U.S., interest rates are at record lows, government loans and guarantees are now estimated at almost $13 trillion to deal with the recession, the central bank debt has more than doubled to $2 trillion, and it is estimated that the government fiscal deficit will be about 12% of GDP. It is only reasonable to expect that such extraordinary measures should have some positive effect.

Keynesians claim the ability to see “green shoots”, indicating that their way will save world capitalism. These “green shoots” are driven by ideology and not reality, and can only be seen by Keynesians. Housing starts, having collapsed from 1,823,000 to 358,000 is a “green shoot” because they have not collapsed to zero. A slowing in job losses, even as hours worked collapses at a 9% rate is another “green shoot”. Keynesians have even examined the nations banks to find even more “green shoots”. In spite of rising loan delinquencies, foreclosures, and falling asset values, Keynesians see the creative ability of banks to post profits by creative accounting as a sure sign that banks can use the same creative ability to withstand even greater loan delinquencies and foreclosures.

Housing re-sales consist 50% of foreclosed homes. With hundreds of thousands of foreclosures held off the resale market, with foreclosure filings continuing to reach record levels, and more than 20% of homeowners owing more on their house than the market value, foreclosures and falling house prices will continue to dominate the housing market. Yet even here, Keynesians have found another “green shoot”. One is truly amassed at the genius of Keynesians and their ability to find “green shoots”.

Keynesians have not only deluded themselves by a failed and illogical economic theory, but by leveraging the national economy to this theory, they are on the verge of destroying the capitalist economic system.

The Chinese are beginning to question the wisdom of the Keynesians. Perhaps they are now questioning the wisdom of American consumers going into debt to purchase Chinese goods so that the Chinese can purchase U.S. debt. The Chinese have expressed concern about the future value of this debt. They are calling for the end of the U.S. dollar as a reserve currency, and have recently established currency swaps with Argentina, South Korea, Hong Kong, Malaysia, Indonesia, and Belarus. The Chinese are adding gold to their official reserves, and pleading with the IMF to sell all their gold in order to increase gold reserves further.

The Keynesian’s rely on a functioning bond market to support their economic theory. There must always be someone willing to purchase government debt, no matter how much is required, and no matter how great the government deficit. Record low interest rates and $13 trillion in loans and guarantees have only resulted in a small slowdown in the rate of economic collapse. Take away the ability of the government to go further into debt, or raise current interest costs, and the economic collapse will accelerate dramatically.

The American economy cannot tolerate a stagnant or contracting state for very long. The economy does not generate sufficient cash flow to meet debt obligations, requiring strong economic growth in order to avoid a collapse of the bond markets. Should the economy not respond to the present stimulus, even the federal government may not be able to borrow. A collapse of the bond markets not only takes away the ability of the government to stabilise the banks and the economy, but the resulting high interest rates will bring America down both economically and politically.

Perhaps the Chinese sense this. In their quest for world domination, economic warfare may be cheaper and more effective than a military conflict. A fire-sale of their U.S. debt holdings at a time the U.S. needs to raise $3 trillion in new loans could substantially raise interest rates, and call into question who has the financial capacity and desire to invest $4 to $5 trillion in U.S. government debt.

To avoid an economic collapse, and prevent outside forces from taking advantage of it’s present vulnerability, America needs to fundamentally alter its financial system. This involves a controlled collapse of the commercial banks and the Federal Reserve Board. The creation of the means of exchange must be taken away from the commercial banks and Federal Reserve, and given to the Treasury. Money would be in the form of Treasury notes (T.N.). The first step would be to simply create sufficient T.N. to purchase all bank assets.

Bank deposit holders, no longer being able to use bank deposits as currency, would close their accounts in return for the T.N. the banks acquired in exchange for their loan assets. These T.N. would be held at banks established by the Treasury department with transactions occurring electronically. The Treasury now owns all debt obligations, presenting it with a number of policy options. One policy would then be to cancel all debt, and in a simple step solve the present debt crisis. Alternatively, all interest payments could be cancelled, with principle payments used to fund government operations, eliminating the need for government taxation. The commercial banks, no longer having any assets or liabilities cease to exist.

Having solved the debt problem and establishing a stable monetary base, America will be able to achieve economic prosperity unparallel in human history. This of course is too much for the Keynesians. They would rather go deeper into debt and continue their search for “green-shoots”.

Keynesians suffer from a severe case of self-deception. Not only do they not understand economic analysis, but also they do not have a clue about how the banking system really operates. Keynesians are firmly in control of the American government. Instead of altering the structure of the financial system and bringing about a controlled collapse of the commercial banks, they are providing unlimited public funds in a useless attempt to bail out the pyramid scheme known as commercial banking.

The case for owning gold is not driven by the fear of future inflation. As a general rule, debt repayments are deflationary in nature, while debt creation is inflationary. However, much of the recent debt created by the U.S. government has not been used to increase economic activity, but has been injected into the financial system. Public debt has been used to finance the losses of the financial system. This still leaves the economy in a deflationary bias, due to existing debt levels.

On one level, a deflationary economy is positive for the bond market, as it increases real interest returns. However, a deflationary economy results in falling cash flows and asset values, leading to debt defaults and write-offs. It is the collapse of the bond markets and commercial banks that will drive the price of gold. The Chinese appear to sense this. Keynesians will drive the American economy into the ground. The interesting question is whether the Chinese will take advantage of both Americas vulnerability and stupidity and act so as to accelerate the financial and economic collapse.

John Kutyn
May 11, 2009

Posted in Gold, Dollar Collapse, General | Print | No Comments »

30/11/2008 by Philinje.

Here is a YouTube video of a Bloomberg interview with a currency specialist. Sounds quite reasonable.

http://www.youtube.com/watch?v=CgJ2ZhBsY3w&feature=channel

Dollar weakness until mid-Jan, and Yen weakness (maybe to 98 against USD). Then Euro will weaken but not as much as the pound.

The level to watch is 80 on the USDX. There is likely a new crash in the markets by early March, and that might send the USD to 88.5 or beyond. This will weigh on gold, but it is hard to say how much, because gold is showing relative strength compared to the USD.

Eventually gold will not be so closely tied to the USD. Loss of confidence and inflationary expectations will drive gold hard, and the USD will follow in the opposite direction. Right now the forced de-leveraging is causing a temporary spike in the dollar and low in gold, but other forces will take over gold before too long.

However, we haven’t seen the bottom in equities yet, so after the end-of-year rally, watch out. Even after March, there will likely be another lower low coming in 2010. But maybe we’ll see a decent rally from March to end of next year, coincident with a dropping dollar and rising inflation expectations.

Posted in Dollar Collapse | Print | No Comments »

08/11/2008 by Philinje.

This article is a fairly sane and reasonable assessment:

http://www.gold-eagle.com/editorials_08/laird110608.html

The basic premise is that once the US consumer stops buying beyond their means, foreigner stop funding the deficit, then Treasuries go down the tube and the dollar tanks by 70% or more.

He says within 4 years, maybe in the next 2 years.

The flight to safety is lifting up 3-month Treasuries and the dollar, but as soon as popular attention focuses on inflation again, the flight to safety will find other places to go because the real rate of return in the US is already negative and will become more so.

The Euro is probably not a safe haven (it’ll fall with the USD), and neither is the Yen, which has no return at all. That leaves gold.

Jim Sinclair is asking his readers to take delivery of Comex contracts, and there are rumors of a default on December Gold at the Comex. Looks like the markets will take another dive and that could cause more de-leveraging, but I think gold will be ok. Weak, but ok, into mid-November.

Then watch out! We may see a big move up in December. Then early next year the real fireworks begin.

Posted in Gold, Dollar Collapse | Print | No Comments »

26/04/2008 by Philinje.

The Euro has hit 1.60 against the USD 4 times, and the latest attempt this week failed. There is a general sense that markets are past the worst of the credit crisis, but that may be wishful thinking. The British pound has been falling in sympathy with the dollar of late.

The world’s favorite carry trade currency, the Yen, has been falling again because of the recent sense of calm. But don’t get complacent - things may not have bottomed yet.  According to people like Jim Sinclair (see Blogroll), we are nowhere near the bottom, nor the top of the Euro.

Posted in Dollar Collapse | Print | No Comments »

26/04/2008 by admin.

Welcome to the wacky world of currencies. This dicussion will provide pointers on movements in world currencies.

Posted in Dollar Collapse | Print | No Comments »