Oct 31

Tea Leaves & $2000 Gold

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Yes, some people are still forecasting $2000 gold by year’s end…

BOB and BARB Moriarty launched 321gold.com over 10 years ago, adding 321energy.com the better to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy as well as precious metals.
Previously a US Marine fighter pilot, and holding 14 international aviation records, Bob Moriarty here tells The Gold Report why he’s 100% certain that a market crash is looming… 
The Gold Report: Bob, in our last interview in February, we had currency devaluation in Argentina and Venezuela, interest rate hikes in Turkey and South America, and a cotton and federal bond-buying program. Just eight months later in October, we’ve got Ebola, ISIS and Russia annexing Crimea plus a rising US Dollar Index. We’ve also got pullbacks in gold, silver and pretty much all commodity prices. With all this news, what, in your view, should people really be focusing in on?
Bob Moriarty: There is a flock of black swans overhead, any one of which could be catastrophic. The fundamental problems with the world’s debt crisis and banking crisis have never been solved. The fundamental issues with the Euro have never been solved. The world is a lot closer to the edge of the cliff today than it was back in February.
About ISIS, I think I was six years old when my parents pointed out a hornet’s nest. They said, “Whatever you do, don’t swat the hornets’ nest.” Of course, being six years old, I took stick and went up there and swatted the hornets’ nest, which really pissed off the hornets. I learned my lesson.
We swatted the hornets’ nest when we invaded Iraq and Afghanistan. What we did is we empowered every religious fruitcake in the world. We said, “Okay, here’s your gun, go shoot somebody. We’ll plant flowers.” We are reaping what we sowed. What we need to do is leave them to their own devices and let them figure out what they want to do. It’s our presence in the Middle East that is creating a problem.
TGR: Will stepping back allow the Middle East to heal itself, or will there be continued civil wars that threaten the world?
Bob Moriarty: We are the catalyst in the Middle East. We have been the catalyst under the theory that we are the world’s policemen and that we’re better and smarter than everybody else and rich enough to afford to fight war after war. None of those beliefs are true. The idea that America is exceptional is hogwash. We’re not smarter. We’re not better. We’re certainly not effective policemen.
The Congress of the United States has been bought and paid for by special interest groups: part of it is Wall Street, part of it is the banks and part of it is Israel. We’re just trying to do things that we can’t do. What the US needs to do is mind its own business.
TGR: You’ve commented recently that you’re expecting a stock market crash soon. Can you elaborate on that?
Bob Moriarty: We have two giant elephants in the room fighting it out. One is the inflation elephant and one is the deflation elephant. The deflation elephant is the $710 trillion worth of derivatives, which is $100,000 per man, woman and child on earth. Those derivatives have to blow up and crash. That’s going to be deflationary.
At the same time, we’ve got the world awash in debt, more debt than we’ve ever had in history, and it’s been inflationary in terms of energy and the stock market. When the stock and bond markets implode, as we know they’re going to, we’re going to see some really scary things. We’ll go to quantitative easing infinity, and we’re going to see the price of gold go through the roof. It’s going to go to the moon when everything else crashes.
TGR: How are you looking at the crash – short term, before the end of this year? How imminent are we?
Bob Moriarty: Soon. But I’m in the market. Not in the general market, but I’m in resources. There’s a triangle of value created by a guy named John Exter: Exter’s Pyramid. It’s an inverted pyramid. At the top there are derivatives, and then there are miscellaneous assets going down: securitized debt and stocks, broad currency and physical notes. At the very bottom – the single most valuable asset at the end of time – is gold. When the derivatives, bonds, currencies and stock markets crash, the last man standing is going to be gold.
TGR: So the last man standing is the actual commodity, not the stocks?
Bob Moriarty: Not necessarily. The stocks represent fractional ownership of a real commodity. There are some really wonderful companies out there with wonderful assets that are selling for peanuts.
TGR: In one of your recent articles, “Black Swans and Brown Snakes“, you were tracking the US Dollar Index as it climbed 12 weeks in a row, and you discussed the influence of the Yen, the Euro, the British Pound. Can you explain the US Dollar Index and the impact it has on silver and gold?
Bob Moriarty: First of all, when people talk about the US Dollar Index, they think it has something to do with the Dollar and it does not. It is made up of the Euro, the Yen, the Mexican Peso, the British Pound and some other currencies. When the Euro goes down, the Dollar Index goes up. When the Yen goes down, the Dollar Index goes up. The Dollar, as measured by the Dollar Index, got way too expensive. It was up 12 weeks in a row. On Oct. 3, it was up 1.33% in one day, and that’s a blow-off top. It’s very obvious in hindsight. I took a look at the charts for silver and gold – if you took a mirror to the Dollar Index, you saw the charts for silver and gold inversely. When people talk about gold going down and silver going down, that’s not true. The Euro went down. The Yen went down. The Pound went down and the value of gold and silver didn’t change. It only changed in reference to the US Dollar. In every currency except the Dollar, gold and silver haven’t changed in value at all since July.
The US Dollar Index got irrationally exuberant, and it’s due for a crash. When it crashes, it’s going to take the stock market with it and perhaps the bond market. If you see QE increase, head for your bunker.
TGR: Should I conclude that gold and silver will escalate?
Bob Moriarty: Yes. There was an enormous flow of money from China, Japan, England, Europe in general into the stock and bond markets. What happened from July was the equivalent of the water flowing out before a tsunami hits. It’s not the water coming in that signals a tsunami, it’s the water going out. Nobody paid attention because everybody was looking at it in terms of silver or gold or platinum or oil, and they were not looking at the big picture. You’ve got to look at the big picture. A financial crash is coming. I’m not going to beat around the bush. I’m not saying there’s a 99% chance. There’s a 100% chance.
TGR: Why does it have to crash? Why can’t it just correct?
Bob Moriarty: Because the world’s financial system is in such disequilibrium that it can’t gradually go down. It has to crash. The term for it in physics is called entropy. When you spin a top, at first it is very smooth and regular. As it slows down, it becomes more and more unstable and eventually it simply crashes. The financial system is doing the same thing. It’s becoming more and more unstable every day.
TGR: You spoke at the Cambridge House International 2014 Silver Summit Oct. 23-24. Bo Polny also spoke. He predicts that gold will be the greatest trade in history. He’s calling for $2000 per ounce gold before the end of this year. We’re moving into the third seven-year cycle of a 21-year bull cycle. Do you agree with him?
Bob Moriarty: I’ve seen several interviews with Bo. The only problem with his cycles theory is you can’t logically or factually see his argument. Now if you look at my comments about silver, gold and the stock market, factually we know the US Dollar Index went up 12 weeks in a row. That’s not an opinion; that’s a fact. I’m using both facts and logic to make a point.
When a person walks in and says, okay, my tea leaves say that gold is going to be $2000 by the end of the year, you are forced to either believe or disbelieve him based on voodoo. I don’t predict price; I don’t know anybody who can. If Bo actually can, he’s going to be very popular and very rich.
TGR: Many people have predicted a significant crash for a number of years. How do you even begin to time this thing? A lot of people who have been speculating on this have lost money.
Bob Moriarty: That’s a really good point. People have been betting against the Yen for years. That’s been one of the most expensive things you can bet against. Likewise, people have been betting on gold and silver and they’ve lost a lot of money. I haven’t made the money that I wish I’d made over the last three years, but I’ve taken a fairly conservative approach and I don’t think I’m in bad shape.
TGR: Describe your conservative approach.
Bob Moriarty: The way to make money in any market is to buy when things are cheap and sell when they’re dear. It’s as simple as that. Markets go up and markets go down. There is no magic to anything.
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Oct 31

King Dollar in a Bull Market

Gold Price Comments Off on King Dollar in a Bull Market
But change your goggles and hey! Commodities in AUD not too bad…!

BORING as it sounds, I want to talk a bit about the end of US QE today, writes Greg Canavan in The Daily Reckoning Australia.
Because it’s very important to how markets are going to behave over the next few months.
As you probably know, yesterday the US Federal Reserve voted to end its policy of quantitative easing. But it will still be reinvesting the interest payments from its $4 trillion plus portfolio and rolling over any maturing treasury securities, so it’s balance sheet will continue to grow, albeit much more slowly.
On the surface, US markets didn’t seem too fussed about the end of an era. Shares sold off around the time of the Fed’s statement and then rallied towards the close. Probably a case of “algo’s going wild” as automated high frequency traders tried to make sense of the Fed’s statement.
And the Fed did its usual job of promising to hold rates as low as they possibly could, which markets seemed happy enough with.
But the real action took place under the surface. That is, the US Dollar spiked higher again. This is an important point because when the US Dollar rallies, it usually signifies tightening global liquidity.
Think of it as liquidity returning to the source (US capital markets) and drying up…or disappearing. That’s certainly what has been happening these past few months. Since bottoming in May, the US Dollar index (which measures the greenback’s performance against a basket of currencies) has increased by nearly 9%.
That might not sound like a huge spike, but in the world of currency movements, it is. Imagine if you’re an exporter and your product just became 9% more expensive…chances are it will lead to a drop in sales as customers look for a cheaper substitute.
This is the problem with the end of QE. It leads to liquidity evaporation as ‘punt money’ returns home…which leads to a strengthening US Dollar…which hurts sales of US multinationals.
It’s not going to happen right away though. Most companies have hedging strategies in place that protect them from sharp moves in the FX markets. But if Dollar strength persists…and the chart above says that it will, then you’ll see the strong Dollar hitting companies’ revenue line in the coming quarterly reports.
Not only that, but the evaporation of liquidity in general could lead to another bout of selling across global markets. QE is all about providing confidence. Liquidity is synonymous with confidence. Take it away and you’ll see the mood of the market change.
Getting back to the Dollar strength…it’s a headache for Australia too. It’s smashing the iron ore price, and the Aussie Dollar isn’t falling fast enough to keep up. In terms of the other commodities though, things aren’t quite so bad.
All you seem to hear lately is negative news about commodities. That’s because the world prices commodities in US Dollars, and as you’ve seen, the US Dollar is a picture of strength. But if you look at commodity prices in terms of Aussie Dollars, things look a little better.
The chart below shows the CRB commodity index, denominated in Australian Dollars. It’s a weekly chart over the past five years. And y’know what…it doesn’t look that bad! Since bottoming in 2012, it’s made considerable progress in heading back to the 2011 highs.
But you’ll want to see it start to bottom around these levels. If it doesn’t, prices could head much lower.
The thing to note about this chart is that it doesn’t include the bulk commodities – iron ore and coal. These commodities tend to dominate the headlines in Australia. Things like nickel, tin, copper and oil don’t get much of a look in.
Which reminds me, in case you missed it, Diggers and Drillers analyst Jason Stevenson recently released a report on some small Aussie oil ‘wildcatters’. With the oil price low, now could be a good time to sniff around the sector.
You could say that about commodities across the board. In the space of a few years, they’ve gone from hero to zero…or the penthouse to the…
That usually means there could be some good value around. One thing you need to look for in the current environment is a decent demand/supply dynamic. Iron ore in particular is heading towards massive oversupply next year. I reckon that makes it a poor investment choice for the next few years.
You’re better off to wait until the China slowdown and supply surge knocks out the juniors and all the marginal producers….leaving the market to BHP and Rio. You’ll then probably be able to pick these mining giants up at much lower levels.
Once you find a commodity with good supply/demand fundamentals, you need to make sure the producer is low cost. That protects it against further price falls…or a rise in the Australian Dollar.
It also protects it against foreign competition. One of the issues with the Aussie resources sector in recent years is costs. Other countries have much cheaper capital and labour costs and can therefore get stuff out of the ground cheaper than us.
That brings me to a final issue: Australia doesn’t really invest in its own resource sector. Via superannuation, we have a huge pool of capital. But this mostly goes into the banks or the major miners. Superannuation capital is not high risk capital.
That means a lot of the capital that flows into the resource sector is foreign. And when global financial conditions change…like the end of QE and the strengthening of the US Dollar…that capital departs.
This will create problems and opportunities for the sector. But given the bearishness towards commodities in general, it’s probably time to start getting interested again.
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Sep 18

US Dollar Index Still Rising

Gold Price Comments Off on US Dollar Index Still Rising
When the you-know-what hits the you-know-where, people buy what the…? 

“WE CONTINUE to believe that we are moving into a ‘strong US Dollar world’,” wrote Louis-Vincent Gave, the investment strategist, in a recent note to his investors, says Chris Mayer in The Daily Reckoning.
“This makes for a very different set of winners and losers, and very different portfolios, than what most investors have been used to over the past decade or so.”
I think there is a good case for a strong US Dollar for the rest of this year and into next. We’ll look into the argument here and what its chief effect is likely to be.
Gave’s comments inspired me to set down my own. In his note, Gave shared a chart showing the Dollar Index since circa 1985. The Dollar Index measures the value of the Dollar against a basket of foreign currencies. The Euro makes up more than half the index (and European currencies did before the creation of the Euro). The Yen, Pound and Canadian Dollar fill out the bulk of the rest of the basket.
I share the chart because I think the pattern shown might surprise you. After all, didn’t the US government run widening deficits after the crisis? Didn’t the central bank engage in “money printing”? And wouldn’t you expect these would drive the Dollar lower?
You might’ve. Plenty of people did. And they were (and are still) wrong. “As things stand,” Gave wrote, “we are basically trading roughly at the same levels that have prevailed for most of the post-2008 crisis period.”
I think there is a good case for a strong US Dollar for the rest of this year and into next.
In fact, the US Dollar Index recently put in an 11-month high. There are a few reasons I’d point to for that strength against foreign currencies to continue.
First, the US trade deficit continues to shrink. According to the latest readings in June, the deficit shrank by 7%. When the trade deficit shrinks, that means fewer net Dollars flow overseas. Hold that thought.
Second, the federal deficit is also shrinking. For the fiscal year ending September 2014, the deficit will be around $500 billion. That’s less than one-third of what it was in 2009 – the recent peak. Lower deficits means fewer Dollars injected into the system.
Now put the two together. You know basic economics. What happens when the supply of something gets tighter? Its value rises, assuming demand stays the same.
Aye, what about Dollar demand? There is steady demand for US Dollars from abroad, because it is the world’s reserve currency. Meaning just about everyone uses it to settle up international trade.
As Gave writes in his book, Too Different for Comfort, it’s not easy to unseat a reserve currency. After running through some history, Gave concludes:
“A reserve currency is thus a bit like a computer operating system – it pays to use the one that everyone else is using, and the more people use one system, the less incentive there is to switch. Once a reserve currency gets entrenched, therefore, it is exceedingly difficult to dislodge, because the benefits of the new currency have to outweigh those of the old one, not by a little, but by a lot.”
Of course, the Dollar’s standing won’t last forever. But I think we can safely say the US will remain the standard for years yet. There is simply no competitor on the near horizon. Not even one that’s close. True, a variety of emerging markets and other countries have learned to use other currencies to settle transactions. That’s just good sense. They’ve been caught short of Dollars before and had to endure a crisis of some sort as a result. But these transactions are small in the scheme of things.
Meanwhile, those foreign markets are growing and the demand for Dollars ought to remain at least stable. Thus, the Dollar Index is putting in that 11-month high.
Part of the US Dollar strength also comes from the fact that there are lots of attractive assets in the US that foreigners like to buy and own. They have to pay for them in Dollars. Gave makes this point in his book, too. When the US Dollar gets cheap, Brazilians rush in to buy condos in Miami. Canadians pick up second properties in Arizona. Russians buy New York condos. Foreign pension funds buy up US debt, stocks and real estate.
And whenever there is a crisis, what do people do? They go to cash, and that means US Dollars. They buy US T-bills. When the you-know-what hits the fan, it is still the Dollar they retreat to. They’re not buying Chinese Yuan. Gold is another asset seen as a safe haven, but the gold market is tiny and off the radar of the big pools of money out there. When a big fund wants safety, it turns to cash – US Dollars.
So let’s say the Dollar stays strong. What effect could it have?
It could drive US interest rates even lower. If you look at the 10-year securities of the big EU countries, Japan, Canada and other developed nations, you find that interest rates are all lower than in the US But as Gave asks, “Why own 10-year bonds yielding 1%, or Japanese government bonds yielding 0.5% in falling currencies, when you can own 10-year US Treasuries denominated in a rising Dollar yielding 2.5%?”
This is the question the market will be asking itself soon, especially as/if that Dollar Index continues to make highs. Then you can expect to see US Treasury yields falling to levels where these other developed markets already sit.
All is to say that if you are looking to get out of the US Dollar, cool your jets. As long as the trends above are in place, the Dollar Index might be on the verge of a bigger rally.
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Sep 16

The Most Important Chart Right Now

Gold Price Comments Off on The Most Important Chart Right Now
Dollar up, everything down. And the end of QE means it probably isn’t done yet…

I WANT to show you the most important chart in the investing world right now. It’s affecting the price of just about everything else, writes Greg Canavan in The Daily Reckoning Australia.
If the United States’ superpower status is on the decline, you wouldn’t know it by looking at the chart below – the US Dollar index. As you can see, it’s moved sharply higher over the past few months.
The momentum indicators at the top and bottom of the chart are severely ‘overbought’, and the index itself is well above the moving averages. This suggests a correction is imminent, but for now, everything denominated in US Dollars is weak.
The Aussie Dollar, gold, copper, oil and most other commodities have all been under pressure lately. And it’s why share markets around the world are struggling to push mindlessly higher…as they’ve been doing ever since late 2012 when Ben Bernanke and Co. got jiggy with it on the QE front.
But next month, it all changes. For a short time at least, global share markets will experience life without Federal Reserve QE for the first time since 2011.
In short, the market is having another ‘taper tantrum’ as the end of QE draws closer. The last such episode was back in June 2013. As you can see in the chart above, that was when the US Dollar last spiked to its current level.
Being the world’s reserve currency, US monetary policy is essentially global monetary policy. As the US Federal Reservewinds down QE, you can see the knock on effects starting to emerge.
US Dollar strength is just the most notable. Its strength since bottoming in May this year indicates tightening global liquidity. But until recently, the effects of this haven’t been all that obvious.
Emerging markets are usually most vulnerable to a strengthening Dollar. But that vulnerability only began to show in the past week or so, as you can see in the emerging markets index chart below…
Emerging markets rallied to new highs this year despite the strengthening Dollar. Until recently that is – when sharp falls took place, especially in markets like Turkey and Brazil. The Bank for International Settlements warned in its just-released quarterly report that these markets are particularly vulnerable because of increased US Dollar borrowing over the past few years.
As you know, borrowing in a strong currency while revenues and earnings are in a weaker currency doesn’t usually work out well. It places greater pressure on a company to service its debts, leaving less left over for shareholders.
You’ll have to wait and see whether emerging market resilience can continue, or whether the end of QE will finally have a more definitive impact on these peripheral economies.
I don’t know what the outcome will be. But I can say that markets often ignore issues for months on end and then all of a sudden worry about them acutely. Maybe this is just the start of an intense worry phase.
Whatever it is, Australia is a part of it. Our stock market and currency are under the pump, thanks to weaker commodities and a weaker iron ore price in particular. That, in turn, is because of a slowing Chinese economy, which, as it turns out, imports US monetary policy through a partially pegged exchange rate.
The US Dollar’s tentacles have a wide reach. And it touched China on the weekend with the Middle Kingdom announcing weaker than expected industrial production, fixed asset investment and retail sales growth.
The slowdown comes amid a deteriorating property market in China, which for years was the engine of growth for the country. But that engine is sputtering as China’s leaders grapple with trying to rebalance the economy without crashing it. It’s a tough task.
Which is why you can expect to hear calls for ‘more stimulus’ from China grow louder this week, because ‘more stimulus’ always works. If only we had done ‘more stimulus’ sooner rather than later, we’d not be in the position of needing ‘more stimulus’ now.
Economics really is that simple. Money may not grow on trees but it does lay dormant and abundant inside the computers of our heroic central bankers. (In case you need me to say it, yes…I’m being sarcastic.)
For that reason, all eyes will be on the Federal Reserve this week. They gather for a two-day meeting on the 16th and 17th, and boss Janet Yellen gets a chance to move markets with an accompanying press conference at the conclusion of the meeting.
Usually, the Federal Reserve provides soothing words about how interest rates won’t go up for ages and everyone can keep punting without any need to worry. That’s worked well for the past few years.
But the time is approaching where the Fed will actually start having to do something on the interest rate front. Or at least they’ll have to stop pretending they’ll keep interest rates low forever.
In other words, there are fewer rabbits in the hat. Or maybe there are no rabbits left at all?
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Jun 03

Swap Gold for Greenbacks

Gold Price Comments Off on Swap Gold for Greenbacks
One’s been going up. The other has not…

GOLD can’t catch a bid, writes Greg Guenthner in Addison Wiggins’ Daily Reckoning. And the US Dollar is staging a stealth rally that could send it sprinting toward its 2013 highs.
Welcome to trading in 2014…
I said a couple of weeks ago that if we see gold slip below $1280, a quick tumble back to its lows near $1200 was a very real possibility. I also said you should avoid the miners and the metal due to their downright terrible behavior.
Well, everything began to unravel quickly last week. Gold dropped nearly $30 Tuesday to $1263. That’s far below the $1280 threshold. Traders took notice – and gold hasn’t even enjoyed a relief rally since the selloff.
It finished lower every single day last week. While a relief rally isn’t out of the question, I suspect it continues to push lower. Gold futures are less than 5% above their December lows just below $1200…
Meanwhile, the US Dollar Index is putting together a stealth rally that could quickly send it back above its January highs.
After leaking lower, greenbacks are beginning to make a move. The Dollar Index shot off its early May lows and has now trended higher for nearly three weeks…
Check out how the Dollar Index found a bottom at $79 – the same place it bottomed in late October. That’s a solid foundation for a move higher…
Just a few weeks ago, many analysts were talking about a potential breakdown in the Dollar. But things aren’t always as they first appear. Many times, the best trades are the ones you least expect.
The charts are telling us its time to trade your gold for greenbacks. That could make for a very interesting summer…
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Oct 23

Dollar Shocker! Not the Worst vs. Gold

Gold Price Comments Off on Dollar Shocker! Not the Worst vs. Gold

Gold Bullion has risen faster against the Euro and Sterling than vs. the Dollar…

TO THE SURPRISE of many investors, the Yankee Dollar has earned only a third-place ribbon for its depreciation against gold over the past 12 months, writes Brad Zigler at Hard Assets Investor.

With all the recent hoopla and headlines about gold making new highs against the greenback, the destruction derby of the world’s reserve currencies is actually won by the Euro, with Sterling close behind, on an annual basis.

Over the past year, the US Dollar lost 29.8% vs. bullion compared with a 39.7% tumble for the European common currency and a 34.5% decline in the British Pound. Bringing up the rear is the Swiss Franc, with a 23.1% loss, and the Japanese Yen, which gave up 16.4% to gold.

Oddly enough, the US Dollar is also the least volatile reserve currency when it comes to Gold Bullion purchasing power, too.

The standard deviation of the Gold Price in Dollars stands at just 15.3% for the past year. This may not seem like a testament to the Fed’s steady hand on the nation’s economic tiller, but it’s something. It actually bespeaks the wait-and-see attitude of the central bank after last year’s stimulus and accommodation.

The likelihood of Fed intervention increases when commodity prices – a basic metric of inflation – rise or fall significantly compared with Treasury securities. In the chart below, the red Fed Indicator line dances within a neutral zone – a condition that compels the central bank to watch, but not act. A sustained move in the indicator above the upper band would signal an increased likelihood of accommodation – or lower money rates and a weaker Dollar.

A dip below the lower band flashes a higher probability of tightening, or higher rates and a stronger Dollar…

Keep in mind that this indicator is just that – an indicator. It measures the likelihood of Fed intervention, not its certainty. Political considerations – which can be substantial – are put aside here.

For now, the Fed’s keeping a fairly even keel – even though it’s been economically painful for employees or the unemployed. There’s nascent inflation, reflected in the blue line’s recent trajectory, which complicates the Fed’s handling of the Dollar. What’s economically expedient may not be politically fruitful.

On the other side of The Pond, Sterling’s been the most volatile currency, flopping about with a 17.8% standard deviation in the Gold Bullion market. Largely, this reflects the rising and falling fortunes of the former Labour government. And with all this, one can’t ignore the longer-term trends.

Since the Euro’s introduction in 1999, the Pound’s lost more ground to Gold Bullion than any other reserve currency. Sterling’s average annual loss in gold purchasing power has been 15.3%. The US Dollar follows with an average loss of 14.8% per year. Meantime, the Euro’s given up an average 13.1% each year.

Kinda makes you wonder who’ll take the pennant next year!

Buying Gold online today…?

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Sep 30

Mine’s Bigger Than Yours

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Currency wars over who’s got the most money to burn are fuelling the Gold Price rally…

AS THE Gold Price moves through yet another major milestone – $1300 per ounce – some heavy hitters in the marketplace are beginning to wonder if the yellow metal’s rally is getting a bit too frothy, or even worse, writes Gary Dorsch, editor of the Global Money Trends newsletter.

Is a speculative bubble brewing – and one which might ultimately deflate under its own weight, leading to a sharp correction? On Sept 15th, famed hedge fund trader George Soros said that Gold Prices might continue to rise, but warned that that gold is the "ultimate bubble"…

"Gold is the only actual bull market currently. It just made a new high yesterday. In the present circumstances that may continue. I call gold the ultimate bubble, which means it might go higher. But it’s certainly not safe and it’s not going to last forever."

Soros has been bullish on gold in a big way, and as of June 30th, the Soros fund held 5.24 million shares of the SPDR Gold Trust GLD, a stake worth about $650 million today.

Soros’s fund also held equity holdings in Gold Mining corporations, plus other minerals, worth almost $250 million.

Over the past two months, there’s been a global stampede into precious metals, with investors of many different stripes, and from many countries, scurrying to Buy Gold and silver in both the physical market and through exchange traded funds.

The World Gold Council reported that the demand for gold worldwide surged 36% in the second quarter of 2010, swelling to 1,050 tonnes. The Greek debt crisis, instability in Irish and Portuguese bonds, and expectations the Fed would unleash "Quantitative Easing" (aka QEII) – flooding the world with a new tidal wave of freshly printed US Dollars – has supported the historic bull run. Europe accounted for more than 35% of the retail purchases of Gold Coins during the second quarter.

The latest surge in gold and Silver Prices was sparked in July, following comments from Fed officials signaling that QEII could be around the corner. On July 22nd, Fed chief Ben "Bubbles" Bernanke reassured congressional lawmakers the central bank is prepared to print more Dollars if the US jobless rate continues to hover around 10%.

"We are ready and will act if the economy does not continue to improve, if we don’t see the kind of improvements in the labor market that we are hoping for and expecting. Unemployment is the most important problem that we have right now. What we can do is make financial conditions as supportive of growth as we can and we certainly are doing that…"

On August 19th, St Louis Fed chief James Bullard was more explicit, signaling his backing for further monetization of the US government’s debt.

"Should economic developments suggest increased disinflation risk, purchases of Treasury securities in excess of those required to keep the size of the balance sheet constant may be warranted. Any additional Treasury buying should be undertaken in a measured, deliberate manner, commensurate with the magnitude of the deflation threat."

The Fed’s propaganda artists are operating behind a veil of "smoke-and mirrors", trying to instill the fear of consumer-price deflation amongst bondholders in order to justify another big round of stealth monetization of the US government’s debt.

The Fed’s first go-around with QE, totaling $1.75 trillion, combined with the Bank of England’s £200bn QE-scheme and the Bank of Japan’s ¥21 trillion QE-scheme, fueled a powerful rally in key commodity markets in 2009, lifting the Dow Jones Commodity Index (DJCI) from deep in negative territory, and onto the positive side, thus warding off the threat of deflation in the global economy.

However, since the Fed completed its 12-month buying spree in Treasury bonds and mortgage-backed bonds in March 2010, the year-over-year rate of increase in both the DJCI and the US Producer Price Index have petered out. Last November, the DJCI was hanging around the 135-level, just a shade below the 138.40-level that prevails today. If the DJCI stays stagnant or turns lower in the months ahead, it could knock the US-PPI into negative territory by year’s end, signaling the onset of another bout of deflationary pressures, and triggering a second round of the Fed’s QE.

Thus, on Sept 1st, Philadelphia Fed chief Charles Plosser said the Fed would embark upon further monetary easing if faced with a dangerous downward price spiral.

"If we do need to act, if fears of deflation were to become real, then we would need every ounce of credibility we can muster to convince markets we are not going to let deflation happen…

"I would certainly entertain the solution if I feared deflation, and if I feared that expectations were coming unglued in that direction – then we would have to take actions," he warned.

Interestingly enough, amid all this gloomy talk by Fed officials about the bogeyman of deflation, the demand for precious metals – traditional hedges against inflation and currency devaluations – is booming.

Why? Traders realize that the Fed’s magic elixir for fighting the scourge of deflation is more money printing – otherwise known as the nuclear QE-scheme. US bond dealers, who trade directly with the Fed, aren’t questioning whether QEII is on the table, but are rather taking bets on the size of the next tranche, with estimates ranging between $300 billion and $1 trillion.

Speculation that the Fed would unleash QEII soon has already spearheaded a new round of currency wars across the globe. Central bankers in Brazil, China, Chile, Japan, Russia, South Korea and Thailand have all stepped up their interventions, by injecting large sums of paper into the currency markets, while trying to prevent a precipitous decline in the value of the US Dollar versus their own currencies.

The amount of foreign currency reserves stashed away in the coffers of the Bank of Korea have climbed by $76 billion since April 2009, to a record high of $286 billion – and becoming the world’s sixth-largest after China, Japan, Russia, Taiwan and India. The BoK’s currency reserves are an indicator of the approximate size of its interventions in the foreign-exchange market, utilized to artificially hold down the value of the Korean Won vs. the US Dollar.

The value of the US Dollar is critical to Seoul, since Beijing pegs the Chinese Yuan to the US Dollar, and China is the biggest customer for Korean exporters. Thus, the BoK aims to protect its exporters in both the Chinese and US markets. However, the BoK hasn’t been able to turn the bearish tide against the US Dollar. It’s been overwhelmed by the ideas that the Fed would unleash nuclear QEII. Now the BoK can only try to stem the bleeding – engineering an orderly retreat for the greenback.

The Bank of Korea would of course be much wealthier if it had judged the Gold Price more correctly. The BoK holds only 14 tonnes of Gold Bullion, equivalent to just 0.03% of its total reserves. On Dec 9th, 2009, the BoK’s FX-chief, Lee Eung Baek argued:

"There’s an illusion in gold. Out of more than 200 nations, how many have bought Gold Bullion? Like other central banks, we have been increasing the types of currency reserves outside the Dollar. Gold offers little value, with no cash returns. Since India and Russia with large reserves bought gold, there’s speculation that Korea might buy it too. But we are not classified in the same category. There’s a slim chance that we will Buy Gold from the IMF…"

This was when the yellow metal was changing hands at $1226 an ounce, almost $100 below today’s price.

On Sept 16th, Tokyo’s financial warlords also intervened in world currency markets to drive down the exchange rate of the Yen.

The Bank of Japan sold an estimated ¥2 trillion ($23 billion) to buy up US Dollars. The first such intervention by Japan in more than six years, this was also the biggest ever one-day currency action, and breached a tacit agreement among the Group-of-Seven industrial powers (G7) to avoid unilateral currency interventions.

But Japan had threatened such action for more than six weeks, after the value of the US Dollar declined by 10% from May to a 15-year low of ¥83. The Japanese Yen also climbed sharply in relation to the Euro and the Chinese Yuan…meaning that Japan’s multinationals, listed on the Nikkei 225 index – and heavily dependent on exports – were suffering. The Dollar’s value had declined far below their average break-even point of ¥93, and threatens their ability to compete in selling goods abroad.

Japan’s foray into the currency markets triggered a short squeeze on over-zealous US Dollar bears, and lifted the Dollar as high as ¥86 in short order. However, the Dollar’s one-day rally quickly stalled, as speculators began to bet that the size of the Fed’s QEII would exceed the size of the Bank of Japan’s devaluation schemes. Earlier, the Bank of Japan boosted the size of excess Yen sitting in deposits held by Japanese banks to ¥30 trillion ($350 billion), in an effort to put a floor under the Dollar at ¥84.

Despite the massive size of the Bank of Japan’s injections of Yen into the local banking system, it hasn’t been able to turn the US Dollar’s bearish tide.

That’s because currency traders expect the Fed’s next round of QEII to trump the size of the Bank of Japan’s interventions. Also, US Treasury yields could resume falling further than comparable Japanese bond yields, thus narrowing the US Dollar’s interest-rate advantage over the Yen. In the current round of competitive currency devaluations, the Fed holds the trump card over the Bank of Japan.

Most interesting, Japanese 10-year bond yields are flirting with the psychological 1% level, despite the ballooning of the size of Japan’s public debt, now at ¥909 trillion ($10.5 trillion). Japan’s bond yields are falling, even though its debt-to-GDP ratio is about 180%, which on the surface is worse than 115% for Greece. Yet although public attention tends to focus on Japan’s gross debt, which has soared to ¥909 trillion, the government also owns about ¥700 trillion in assets.

That ¥700 trillion in assets includes roughly ¥180 trillion in real assets, such as public office buildings, and ¥520 trillion in financial assets, including stakes in special corporations. The government can sell these assets and use the proceeds to pay down debt. Thus, Japan’s net debt is about ¥200 trillion, or about 40% of its nominal GDP, which is over ¥500 trillion per year. Perhaps, this is why Beijing hasn’t been afraid to buy ¥1.7 trillion of Japanese government bonds in the first seven months of 2010.

Still, at yields of 1% or less for 10-year Japanese bonds, the only buyers would be short-term gamblers, or those who are convinced that Japan’s economy would be snared in the deflation trap for year’s to come.

Buying JGB’s at yields of 1% or less could lead to large losses over the longer-term. Thus, the more sensible investment for Japanese investors is to Buy Gold against the Japanese Yen. Priced in Tokyo’s money, gold has more than doubled over the past five years, and served as a good hedge against the Bank of Japan’s printing schemes.

Already, the Bank of Japan is monetizing half of Tokyo’s annual budget deficit of ¥44 trillion this fiscal year, and there’s pressure on the central bank to buy more government bonds to weaken the Yen. Although some traders might view the Bank of Japan’s bond-buying operations as a buy signal for JGBs, investors in Tokyo gold have profited more handsomely. Tokyo gold has been tracking the size of Japan’s outstanding debt, since Tokyo’s ruling elite prefer to pressure the central bank to monetize its debts, rather than sell-off state owned assets to finance budget shortfalls.

Gold’s not just tracking Tokyo’s monetary problems, either…

Bank Rossii, Russia’s central bank, manages the Ruble against a basket of Dollars and Euros to limit currency swings that may hurt it exporters. In August, Bank Rossii bought $1.1 billion and €136 million, trying to keep the Ruble within a floating range against the Euro-Dollar’s basket.

This summer’s agricultural drought, the worst in decades, has already shrunk Russia’s trade surplus to $8.3 billion in August, or 29% less than a year ago, and has slowed its economy’s growth rate to 2.4%, with 60% of the fall attributed to the agricultural sector. Thus, Bank Rossi is liable to start increasing the supply of Rubles in the money markets to limit further damage from adverse exchange rates moves to its economy.

The Kremlin earns most of its foreign currency from the sale of Urals blend crude oil, natural gas, and other natural resources, such as timber, platinum, and nickel. Along with rebounding energy and metals markets, Russia’s FX reserves have been replenished to around $478 billion today, from as low as $380 billion in March 2009. Moscow is keen to diversify some of its FX stash into gold, and last May, added 1.1 million ounces equaling 16% of monthly global mining output.

Overall, the Russian central bank bought gold at an average rate of 250,000 ounces per month for the past three years, and now holds an estimated 23.6 million ounces. As of the first quarter of 2010, Saudi Arabia said it had more than doubled its gold holdings from 143 tonnes in Q1 2008 to 323 tonnes this spring, for an average increase of 241,000 ounces a month, or about the same as Russia’s purchases.

Thus, gold traders will keep a close eye on the FX reserves of these two key oil producers.

Brazil has also ramped-up its intervention efforts in the foreign currency markets, buying US Dollars twice each day in order to prevent the greenback from falling below its latest defense line at 1.70 Reals.

Largely due to its super strong currency, Brazil’s trade surplus fell 44% to $7.9 billion in the first half of 2010, down from $13.9 billion a year ago, as imports grew nearly twice as fast as its exports. Four years ago, the Bank of Brazil (BoB) tried to prevent the US Dollar from falling below 2.10 Reals, but failed in its $100 billion intervention effort.

Currently, the BoB is trying to draw a red-line in the sand for the US Dollar at 1.70 Reals, but Brazil’s high short term interest rates, offered at 10.75%, are simply too irresistible to yield hungry investors from around the globe. Foreign inflows of cash into Brazil in the first ten-days of September alone was $2.14 billion. As a result of its relentless intervention efforts, trade surpluses, and foreign direct investment, Brazil’s FX stash has grown to $250 billion, and it’s the fifth largest lender to the US Treasury.

On Sept 15th, Brazil’s Finance chief Guido Mantega vowed to defend the country’s exporters, joining other governments worldwide that seek to weaken their currencies as a way of speeding up an economic recovery.

"We will not sit on the sidelines watching the game, while other countries weaken their currencies at the expense of Brazil. We’re going to take appropriate measures to stop the real from appreciating," he declared in Rio de Janeiro.

Under conditions of slowing growth in the US economy, there’s been an eruption of currency wars worldwide, with an increasing number of governments seeking to secure their share of export markets through outright intervention in the currency markets.

At the heart of the problem, US Senate Banking Committee chairman Christopher Dodd declared China a currency manipulator last week, and said its "economic and trade policies present roadblocks to our recovery." He accused Beijing of stealing intellectual property, violating international trade agreements and dumping goods. Since then, the US Dollar tumbled 1.2% to 6.7035 Yuan.

US Treasury chief Tim Geithner suggested that China should raise the Yuan’s exchange rate by at least 20% and issued a thinly veiled threat, noting that "China has a very substantial economic stake in access to the US market." Meaning, the biggest beneficiary of the growing currency trade wars is the precious metals – silver and Gold Investment – now basking in the growing supply of freshly printed paper currency worldwide.

The prospect of QEII by the Fed is prompting other central bankers to counter with currency devaluations of their own. Yes, some central banks such as Banco de Chile, the Bank of Australia, and the Bank of India are going the opposite way – lifting their interest rates, and their currencies have become magnets for foreign capital. But the Fed has concluded that the only expedient weapon in its arsenal to speed-up the US economy is to inject another tidal wave of US Dollars into the banking system, while aiming to artificially inflate the US stock market higher, and thus, create the illusion of greater wealth and better times ahead.

However, when seen through the lens of gold, or in "hard money" terms, the Dow-to-Gold ratio is still trapped near its lows of Q2 2009, highlighting the notion that the US-economic recovery has been mostly limited to Wall Street and US multinationals. Meanwhile, the divide between rich and poor in the US is getting wider. The Dow Industrials’ 3,800-point rally from the low of March 2009 was a monetary illusion, and Gold Bullion is still best way to preserve wealth.

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