Dollar strength - a bubble soon to burst

With all this uncertainty in Europe, shouldn't gold and silver be going up?

You might think so.

But with the re-emergence of the Greek problem in the global Mainstream Media (MSM) this month, we have seen a return to the "risk-off" trading sentiment - the purchase of greenbacks at the expense of the metals, as fears of a sovereign default lead traders into a rush for liquidity, resulting in a stronger dollar and weaker gold and silver prices.

This phenomenon occurred regularly towards the end of 2011. Wise investors would do well to bear it in mind - particularly when using leverage to trade the metals.

However, the most important thing is to not lose sight of the fundamentals. Ask yourself, does any short-term upswing in the dollar signal the following:

1. An improved US fiscal outlook?

2. A return to a jobs-led real economic recovery?

3. A genuine increased demand for the dollar on the global stage?

If you believe the answer to any of these questions is yes, I would suggest closing your web browser now as this blog is unlikely to be for you!

Dollar strength is merely a reflection of the Euro's more up-front weakness. Psychological shifts take time and the dollar, for the moment, is still the world's reserve currency - a source of liquidity when faced with shrinking balance sheets and perceived strength.

One way or another, the Euro situation will subside. Greece will either be bailed out to the hilt or allowed to default and leave the Euro. Traders minds will move back to the dollar, as will the attention of the MSM. Such a resolution in the Eurozone will be bullish for the single currency, and by extension, bearish for the greenback.

Of course, there is always the possibility of a trigger event as described many times on this blog before. Such an event could be dramatic enough to turn traders' attention away from a still unresolved Euro crisis to an even bigger US crisis.

Whatever happens, we are headed for an unwinding of the dollar, most likely over the course of 2012. Needless to say, this will result in continued higher prices for gold, silver, the commodities and non-US currencies.

EUR / USD calender - February 2012

Dollar positive or negative? For your consideration.

12 February

EU - Greek parliament to vote on the cuts package needed to secure next EU bailout.

14 February

US - Retail sales numbers, Business Inventories and Import Price index.

15 February

EU - Euro zone finance ministers are due to meet to sign off on the rescue package

US - Fed releases minutes of January policy meeting.

US - More data

- Empire manufacturing numbers
- MBA Mortgage apps
- TIC flows.
- Capacity Utilization.

16 February

US - More data

- Weekly jobs numbers
- PPI
- Housing starts
- Building permits
- Mortgage delinquencies
- Philadelphia Fed index.

17 February

US - More data

- CPI numbers for January
- Leading indicators.

29 February

EU - ECB 3-year bank loans - second installment. Estimated between 400-500 billion euros.

Dollar watch - waiting for Archduke Ferdinand

World War 1 was precipitated by the assassination of Archduke Ferdinand in Sarajevo.

What will be the dollar's Archduke moment?

Five scenarios, foreign and domestic, are considered below.

1. US Treasury bond failure

At the sharp end of this scenario, China could just decide to stop buying US debt. Alternatively, a famed Dutch bond-dealer might decide 'safe-haven' US debt just doesn't look so safe any more, causing a stampede out. At the softer end, the US could experience a general increase in the cost of its borrowing as global investors turn their attention away from the Eurozone and develop a greater awareness of the depth and degree of the US problem. To put it simply, you're looking at the dollar being quickly hanged or slowly choked.

2. Iran

A war between Iran, Israel and the US would by itself cause the value of the USD to further decline. Other implications, however, could be far more severe for the USD:

2.1 The Petro dollar - even with just the US/EU sanctions, Iran is turning to its friends India, China and Russia to shore up its oil exports to maintain its economy. When the deals are done, how likely are they to still be in the USD, the world's reserve currency? Whether they trade in gold or local currency won't matter - demand for the USD will plummet taking with it its artificially propped-up value.

2.2. The US' national debt - the US cannot afford a war. In the event of an all-out military affair, the debt ceiling will have to be raised before November's Presidential election. In this event, President Obama will have to ask Congress for more money. Remember the impact on the USD during last August's debt ceiling debacle? The implications are likely to be only more severe this time around.

2.3 Who would even buy the debt? - even in the event Obama succeeded in raising the debt ceiling, who would continue to buy US Treasuries at current prices? It would astonish me if the cat isn't out of the bag by that stage. The only 'solution' remaining will be for the Federal Reserve to step in, knight in shining armour, to monetise the deficits. Vast amounts of newly created money would almost certainly lead to the rapid onset of hyperinflation.

3. Domestic inflation

Whilst the Fed's balance sheet has increased exponentially since 2008, we have not yet seen super-high price inflation. The reason for this is the velocity of money has remained flat - the rate in which money is circulated in the economy has stagnated or slowed. Scarred by the events of 2008 and the ongoing economic recession, banks aren't lending just as consumers aren't spending. However, with recent economic data showing improvement in the nominal GDP figures, banks and consumers might start to feel confident enough to re-start lending and spending - at least to a critical extent, resulting in noticeably greater numbers being recorded on the Government's core inflation measure.

Such an incidence would obviously have foreign, as well as domestic, implications for dollar holders.

4. Commodities exchange default (COMEX)

Hedge fund manager Eric Sprott reported how long it took for his firm to take delivery of the physical silver he had ordered for their ETF. Furthermore, that the dates inscribed on the bars were post the date of order, pointing to a severe shortage on the inventories. Should there be an actual failure to deliver futures contracts for precious metals, confidence in the whole COMEX exchange will be lost and an already crowded physical market will have to make room for more. The result? Sharp price spikes in the metals and equally sharp price movements to the downside in the dollar.

5. Threat of a banking failure

The Fed is on its guard for any sign of another Lehman moment - this will not be allowed to happen. To avoid another bank going down and systemic collapse the Fed will have no choice to print money like crazy to buy up all the bad assets in sight (yes, 2008 all over again). Such a situation would save the banking system (yes, again) but would be dollar negative and with potentially hyperinflationary consequences.

What do you think will happen?

Over and out.

Gold for Oil - Are China and Russia next?

China is ready to jump into the same game. They have a banking system and it connects to the Russian banking and Russia has a fair amount of gold. So there could be a whole network among Central Asian countries, China, Russia, India, Iran and others, who say the time has come leave the dollar system completely. - Jim Rickards, 27 January 2012






Did you catch last week's story?

Not the one about the Fed. The one about India paying Iran gold for oil. And China possibly following suit, after agreeing a landmark trading arrangement with the UAE with the USD expressly not included.

The beginning of the end for the USD as the world's reserve currency?

The jigsaw pieces are falling into place. International indicators have been telling the markets for some time the international greenback is in terminal decline. If it doesn't explode from within as a result of the Fed's easy money policies, it could just as easily explode from without, at any time, through the actions of significant geopolitical players.

If and when an event comes, there will be widespread unpreparedness. The effect will be the currency equivalent of Pearl Harbor. To the prepared, however, the signs have been there for some time and the 'event', whatever that may be, will merely be the snowflake that caused the avalanche.

So what would really turn the markets?

The most likely possibility is some form of bilateral trade agreement between China and Russia, a RMB-Ruble alliance. Were such an announcement to be made, these two geopolitical giants would send the dollar into a tailspin. In turn, you would see the crashing of the US dollar-denominated stock exchanges, a domestic currency collapse on Wall Street followed swiftly by Main Street.

And is this likely to happen soon?

It's certainly possible.

China, as the holder of over $1 trillion dollars of US Treasuries, have obviously been concerned about the decline of the USD for some time and the Fed's announcement last Wednesday is unlikely to have quelled their fears. And Russia has its own regional interests to pursue.

Jim Rickards has foreseen such a possible outcome. Michael Lombardi predicts such an event happening on 13 April 2012. I couldn't possibly comment, save to say that such an event is not behind the realms of possibility and could happen sometime between 2012-2013.

Of course, I'm not saying that this will happen. Merely that it is one possibility among many that could pierce the USD's role as the world's reserve currency and usher in the new currency order (probably backed by gold).

Black swan events, foreign and domestic, will be the subject of my next post.

Over and out for now gold fans.

Gold explodes off Fed's announcement

Gold and Silver made astonishing moves to the upside today on news that the Federal Reserve will hold it's key interest rate at 0% until 2014.

Artificially low interest rates involve the Fed increasing the money supply for the purpose of cheapening credit - activity which is all very inflationary, bearish for the dollar and bullish for Gold.

The extent of the reaction to the Fed's announcement signifies several things, which Jim Sinclair discusses in an interview with King World News:

1. A growing awareness of the extent to which the Fed has been debasing the dollar

2. The start of mainstream and institutional interest in the gold market.

See the King World News blog for Jim's interview.

Is this the 'psychology event' - the fundamental change in perception I am known for talking about?

No, but it is a psychology event and a sign of things to come.

One thing is certain, Gold watchers - interesting times are ahead.

Dollar crunch

Gold trades inversely to the US dollar. Typically, if not always.

In its 41 year history as the world's reserve currency, we have seen gold:

1. Soar against a dollar crisis (witness the 1970s)
2. Decline against perceived dollar strength (witness the 80s and 90s)
3. Rise once again with the longer-term dollar crisis commencing in 2001.

Gold has a historic role as international money - a money incorruptible, the kind that can't be created at will or out of thin air by Governments. When people lose confidence in the Government's money system, they will typically turn to tangible assets such as gold, silver and commodities.

So what's driving the current dollar crisis?

Forget QE, not that that's unimportant. The dollar's real problems lie in the US' growing current account/trade deficits, fiscal deficits and exploding national debt. Now in the red by $15 trillion, the US Government is dependent on foreign creditors for 40 cents of every dollar spent.

Crucially, there are no signs on the horizon that the politicians are doing anything to address this unsustainable development.

Can the cheap credit last forever?

No. Slowly but surely, America's creditors are turning away from the dollar.

Consider China, the USG's largest creditor, with holdings of $2 trillion of US Treasuries/ dollar-denominated securities. Recognising the dollar's fundamental weakness, it has taking steps to diversify away from it and into the open arms of gold. Not only has its central bank been dramatically increasing its net buying of the yellow metal, it has liberalised its domestic banking regulations on gold imports and even encouraged its own citizens to buy through through the newly-formed Gold and Silver Exchange.

With interest rates at 0%, more debt and QE on the horizon, there is no reason to think the dollar will reverse course any time soon.

The day will come when an event will occur. A 'psychology event', as I like to call it. An event which will fundamentally change the way people think about the dollar and its paper promises. In turn, this event will lead to a 'currency event' and the collapse of the dollar in world markets, followed in turn by domestic ones.

The event I speak of will trigger the final phase of the gold bull market - the 'blow off' top witnessed in other such run-ups as the Internet stock and real estate manias.

Watch for the pulling of the trigger:

1. China finally dumps US treasuries on global currency markets;

2. China and Russia agree to dump the dollar and start using a new global currency;

3. A famous dutch bond dealer suddenly decides US Treasury 'safe-havens' no longer look so safe.

4. A no-show at a US Treasury auction leads to sky-rocketing borrowing costs.

Thanks to Jim Rickards and the National Inflation Association for some of these examples.

In short, fasten your seat belts folks and hold onto your hats!

Eurozone Sovereigns: Default or not to default?

The answer doesn't really matter - gold and silver are headed higher.

Consider these three scenarios:

1. Should the Eurozone sovereign debt crisis (and thus the banking crisis) be salvaged through ECB asset purchases of Italian and Greek bonds, the resultant inflation will push investors towards gold and silver faster than ever.

2. Should, in the alternative, the Sovereigns default on their debt thus causing an almost certain default of the banking system, people will want to escape paper money and financial institutions as soon as they can and rush towards gold and silver faster than ever.

3. Should, as is most likely, the ECB hold the line on money printing, the Fed will come to the rescue will more dollar printing - hastening the ultimate collapse of the global reserve currency and pushing investors towards gold and silver faster than ever.

Whichever way you look, the signs for gold and silver remain very bullish.