by Jim Clark, 12/5/14
Volatility has continued to be the condition for gold and the dollar. On Monday, gold moved nearly seven percent from a low of $1,143 to a high of $1,225. The dollar continues to be strong, yet, in spite of that, the price of gold is w, which is unusual and shows that interest in buying gold has resumed. This type of volatility has typically been a precursor to a change in the overall direction of the markets. Since gold has been falling for more than three years, in my opinion, the signs show that gold is poised for a significant move up. Let’s look at the markets and world events that point in that direction….
As I have stated in recent blogs, the major economies of the world such as Japan, The UK, the Eurozone, and China are suffering from economic woes including slow growth, debt, and recession. This accounts for the strong dollar. However, the U.S. deficit just passed the $18 trillion mark. That figure does not add on the unfunded liabilities such as Social Security and Medicare. If you add those, you are looking at closer to $100 trillion in federal obligation. Economist John Williams contends that, “The dollar should be getting much weaker, and indeed it’s going to turn very sharply very soon, and that will be an approximate trigger for a major upturn in inflation.” Williams explains, “The issue remains the dollar. What is distorted in the system right now is the dollar’s strength. It’s strongest it’s been in some time. It’s over stated for multiple reasons ranging from outright manipulation to overstatement of economic growth and other games that have been played. That’s going to reverse shortly. As the dollar sells off, you will see inflation pick up. Part of the reason why oil is where it is now and part of the reason why gold is where it is now is because of the dollar’s strength.” I believe that Mr. Williams is correct. The dollar looks good compared with other currencies, but it too is bound to weaken. And I am not alone in that thinking.
Governments throughout Europe are nervous about another financial crisis due to the global economic situation and huge debt levels in the United States and other countries. As a result, European governments are repatriating their gold from the United States. According to Mark O’Byrne the research director of the world’s leading gold broker, Gold Core, “America is the biggest debtor nation in the world, and is in effect quite close to insolvency. Therefore they (European nations) believe it is more prudent if they keep gold close to home.” Countries that are considering or in process of repatriating their gold include Netherlands, France, Switzerland, and Germany. Since there is a very limited gold market and governments worldwide are printing trillions of dollars in paper money, this move is another factor that could lead to much higher gold prices as well as more loss of faith in the dollar.
During the banking crisis of 2008 the central banks took actions to kick the can down the road without ever solving the basic problem. In fact, the problem continues to be kicked down the road. Just before Thanksgiving, the Daily Treasury Statement revealed that the U.S. Treasury has been forced to issue over $ 1 trillion in new debt since fiscal 2015 which started eight weeks ago. The reason…..in order to raise the money to pay off Treasury securities that were maturing and to cover new deficit spending by the government. In other words, the government rolled over the old debt into new debt and issued enough additional new debt to cover the new deficit spending. Remember what a Ponzi scheme is? It’s a scheme that involves payment of so called “returns” to existing investors from funds contributed by new investors. Does this look familiar? In fact, in October 2013, Treasury Secretary Jack Lew in testimony before the Senate Finance Committee to explain why he wanted the debt limit raised stated, “There is no plan other than raising the debt limit that permits us to meet all of our obligations.” “Let me remind everyone,” Lew said, “principal on the debt is not something we pay out of our cash flow of revenues. Principal on the debt is something that is a function of the markets rolling over.” Amazing, isn’t it? No wonder experts and economists are warning about a weakening dollar. Ponzi schemes can’t last forever. They tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.
Another sign from the times is the latest number from the International Monetary Fund regarding the world economy. For the first time since Ulysses S. Grant was president, America is not the largest economic power on the planet. Yes, the U.S. economy remains bigger than China, but in terms of national economic output in real goods and services, China has surpassed us. This is a remarkable development! Remember that throughout history, political and military power has always depended on economic power. The U.S. has been the dominant power both economically and militarily since early in the 20th century, and the dollar has been the reserve currency of the world since 1944. Prior to that, Great Britain’s might ruled the land and sea, and the pound sterling was the world’s reserve currency. It was Britain’s economic decline that brought about the collapse of her power, as previously had happened to France and Spain. Could the U.S. be on the wane while China is on the rise?
But through the rise and fall of nations, economies, and currencies, history has shown that gold is the supreme safe haven. It has been the most efficient form of exchange the world has ever known. And having the right amount of the yellow metal in your portfolio is a hedge against the economic uncertainties of these times. Call one of our Precious Metals Experts today for a free consultation to see how to protect your hard earned wealth.
I will be keeping a sharp eye on the market, and I encourage you to do the same.