Dollar Falls Before Fed Considers More Pumping…Gold Rebounds

December 10, 2012

The US dollar is starting to fall against world currencies as investors anticipate more stimulus by the Federal Reserve.

The dollar weakened against most of its major counterparts today amid bets the U.S. central bank will add to monetary stimulus. The U.S. currency fell versus the euro and the yen before the Federal Reserve starts a policy meeting tomorrow amid forecasts it will expand bond-buying plans.

“People are looking ahead to the Federal Reserve this week, which should be an event that is positive for risk and negative for the dollar,”  Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York, told Bloomberg News this afternoon.

The U.S. currency declined versus 10 of its 16 most-traded counterparts.

The U.S. Federal Open Market Committee meets for the last time this year on Dec. 11-12. It will consider whether to expand purchases of assets after its so-called Operation Twist program of swapping $45 billion a month in short-term Treasuries for long-term debt expires this month.

“There’s a good chance that the Fed will announce a new round of money printing and bond buying,” which would be negative for the dollar, said Imre Speizer, a strategist in New Zealand atWestpac Banking Corp. (WBC).

Not surprisingly, the weakness in the dollar pushed gold higher. Spot gold was last quoted up $8.00 per ounce to $1,713.00.

Gold tends to move higher on a weaker dollar for two reasons:

1. Gold is priced in dollars, so a weaker dollar naturally pushes up the price of gold in dollars.

2. Gold is considered a main rival to the dollar as the world’s reserve currency, therefore, when confidence in the dollar wanes, demand for gold tends to rise.

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No Laughing Matter

November 29, 2012

The Weekly Standard reports that Senate Minority Leader Mitch McConnell burst into laughter while he was attending a briefing by Treasury Secretary Timothy Geithner on the administration’s plan to avert the impending “fiscal cliff” that threatens the US economy and financial markets.

http://www.weeklystandard.com/blogs/mcconnell-burst-laughter-geithner-outlined-obamas-plan_664210.html

It’s disheartening for investors to hear that the two political parties are so far apart with this unprecedented set of circumstances set to converge in just one month’s time.

This is certainly no laughing matter for investors. Not only might large amounts of our wealth be taken away by higher tax rates and closures of so-called tax “loopholes,” but we are also threatened by fiscal policies that could continue the devaluation of the US dollar and even accelerate what many see as inevitable high inflation. What may be even worse is that the impact could send the US economy into another recession in the process.

That combination of recession and high inflation is called “stagflation,” a phenomenon that we have written about from time to time. The last time the US was inflicted with serious stagflation in the mid-1970s, the stock market fell 45% in 21 months, the price of gold tripled and a broad index of rare coins appreciated by some 1,000%


1987 Redux?

November 16, 2012

Many investors do not remember October 19th 1987.

That was the day the stock market crashed. The Dow fell over 500 points/23% in one day. The crash was a culmination of a decline that had started in August.

It is important to note that gold served as the best source of liquidity during that crisis and increased in price between October and the end of 1987.

We bring this up because there is an important article on Marketwatch that points out distinct parallels between the conditions that existed in 1987 and today:

Current drop echoes 1987 crash prelude

By Jon D. Markman

The Dow Jones Industrials have fallen 450 points over the past two days, and a lot of the blame has been placed on the re-election of the president. But anyone paying attention to the market over the past three months recognizes that the peak was actually made the week that the Federal Reserve announced a third round of quantitative easing. That was expected to be a positive event, but in retrospect, it ushered in a rolling thunder of value-eroding news events.

Soon after began a very underwhelming earnings reporting season, word of a deepening industrial slump in China, a broadening recession in Europe and the martyrdom of Spain. And then this week it suddenly dawned on people that if U.S. lawmakers can’t stop acting like stuck-up brats, then $1.2 trillion worth of ham-handed spending cuts and tax increases are about toplotz on red states and blue states alike in the coming year.

Independent estimates suggest that would shave four percentage points off GDP faster than you can say “sequestration,” or “defenestration” for that matter, and lead to millions of lost jobs. It looks like the president would be OK with that, since he booked a tour of Myanmar for next week.

In short, the election put an exclamation mark on a parade of indignities, but it is far from the only proximate cause. Investors have liquidated U.S. assets for a while; it’s just more noticeable this week.

http://www.marketwatch.com/story/current-drop-echos-1987-crash-prelude-2012-11-09?dist=afterbell


More Trouble for the Euro

November 5, 2012

Over the years, a great deal of attention has been focused on the dollar and its troubles born of feckless fiscal and monetary policies in the US.

Less attention has been paid to the euro–that common European currency started in the late 1990s. The euro is very nearly as significant to the global economy and financial system as the dollar. That’s because the combined economies that make up the European Union are on a par with the US economy in terms of size. And if you look at Europe, you see clearly that their fiscal and monetary policies are very similar to those of the US.

What all this boils down to is that both the dollar and the euro are built on shifting sands. Neither can be considered a long-term viable alternative to the other. Each may benefit in the short-term from trouble in the other, but, over the long-term both of these currencies are shackled by much more fundamental problems.

This is especially significant in view of a recent article published by The Telegraph in the UK which describes the euro’s troubles in detail and proclaims that the euro is entering an era of permanent depression:

http://www.telegraph.co.uk/finance/comment/jeremy-warner/9647248/The-euro-is-heading-for-a-permanent-state-of-depression.html

Investors must not put their trust in man-made paper currencies. Man has the tendency to grossly overproduce when it comes to money. That is happening in the dollar and the euro right now and has been for some time. But men and governments cannot print any more gold. Gold is the ultimate form of real money and has been for 5000 years. Investors need gold to balance a portfolio overweight in paper to provide the diversification and performance potential that only gold can provide when governments undermine the value of their national currencies…


Another Buying Opportunity in Gold

November 2, 2012

The price of gold fell to a two-month low today on a stronger than expected US employment report.

The consensus forecast was for the US economy to add about 125,000 non-farm jobs in October. The actual figure was 170,000. This boosted confidence in the US dollar, which took its natural toll on the price of gold, which fell below $1,700 per ounce.

The reason that this is such a good buying opportunity for investors is that usually gold reacts positively to signs of strength in the US economy. But because so many people are concerned about the US dollar, any good economic news creates speculation that more monetary stimulus may be unnecessary.

Many economists share a different view.

They believe that the existing monetary stimulus is not in fact “working” and thus not responsible for the stronger than expected employment report.

Moreover, the conditions that truly have created a long-term crisis in the dollar are America’s monetary and fiscal policies combined. With annual federal budget deficits of $1 trillion on top of the already gargantuan federal debt of nearly $17 trillion, the world is already awash in dollars it does not want. Couple this with years of low interest rates and a weak dollar is inevitable.

One positive employment report doesn’t change that, it merely creates a correction that represents a great buying opportunity for gold investors.


Hurricane Sandy Intermission Review

October 29, 2012

The markets closed early today due to Hurricane Sandy and trading in gold was subdued due to so many New York traders and investment houses hunkering down for the storm.

So, rather than review today’s inconsequential market results, we decided to look in our archives for articles that we might have overlooked that are particularly relevant to hard asset investors.

We think we found two from just under two weeks ago that everyone should stop and take a closer look at.

First, recently, Pimco, the parent company of the largest bond fund in the world, warned that a further downgrade of America‘s sovereign credit rating is in the cards. They think it’s inevitable and will probably happen just after the first of the year…

http://www.bloomberg.com/news/2012-10-17/u-s-to-get-downgraded-amid-fiscal-theater-pimco-says.html

Second, Mark Hulbert, esteemed editor of the Hulbert Financial Digest, one of the oldest and most respected investment newsletters out there, has pointed out that extensive academic research indicates that a 1987-like stock market crash is “inevitable.”

http://www.marketwatch.com/story/another-stock-crash-like-1987s-is-inevitable-2012-10-17?dist=afterbell

Both of these articles are relevant for investors because they should both serve as warnings that paper assets that might seem secure today, may not actually be so secure tomorrow. If US Treasuries are no longer rock solid and the stock market crashes, gold investments will likely be the most secure assets that an investor can own.

 


Gold at $5,000?

October 29, 2012

One of Wall Street’s true all-stars, who correctly forecast the subprime mortgage debacle back in 2007-2008 is now forecasting sharply higher gold prices over the next two years.

Peter Schiff, head of Euro Pacific Capital, thinks that the combination of runaway government spending and loose monetary policies will cause the price of an ounce of gold to climb to $5,000 per ounce over the next two years.

Note that Schiff sees this eventuality regardless of who wins the presidential election next week…

http://www.cnbc.com/id/49550053

Here is a video of Schiff’s statement on CNBCTV last week:

http://video.cnbc.com/gallery/?video=3000125017