Sunday, August 12, 2007

The US Dollar : An I.O.U Nothing

Following a longer than expected gestation period, and daily denial that the economy had an economic time bomb in the oven, an economic crisis is born...

The Fed Primes The Pump
Lacking any Wall Street buyers for their mortgage loans, commercial banks are left to hold any mortgages they've made in the last few weeks on balance sheet, requiring funds and reserves against them. It's a similar dynamic to what is happening with Wall Street banks that committed to fund leveraged buyouts, only to have trouble selling those loans in the syndicated loan market--they have to hold them on balance sheet until the credit markets come back to life.

Banks are thus forced to go to the Fed for money to cover their funding and reserve requirements. It used to be considered bad form to have to tap the Fed's discount window, where rates are about one point over the federal funds rate, or 6.25%. But the Fed seemed to be signaling Friday that there is no stigma.

Gold will be the beneficiary of these MASSIVE liquidity injections. Gold was at $250 an ounce when money was last pumped into the system at this rate following 9/11. It has since risen 168%. Sadly, this current injection makes the 9/11 injection look like chump change. If Gold rose 168% from today's $670 an ounce price we would see Gold at $1795 an ounce. And that's a conservative guess...and I doubt it will take another 6 years to put in that 168% gain.

Behind the Subprime Crash
My rough calculation suggests that over the last two days the Federal Reserve has pumped in enough new reserves to increase the money supply by somewhere between 10% and 15%.

This is a stunning number. The money supply in a year rarely grows by 10%, for it to do so in 48 hours is mind-boggling. Yes, the Fed has come to the rescue by further pushing the dollar on the road to collapse. While most eyes are on the current mortgage crisis, the bigger danger is the potential collapse of the dollar on foreign exchange markets. The dollar has been slowly falling in value against most currencies for a while. It is at multi-decade lows in some cases. I have feared a further major collapse of the dollar even before the Fed's moves over the last two days.

The mortgage crisis will pass. The Fed will print its way out of this crisis. But, the dollar crisis is ahead and the Fed won't be able to print its way out of that since it's been Fed money printing that is the cause of the world being flooded with dollars.

Bob Chapman, The International Forecaster
Early Friday morning the latest figures we have are the ECB has injected over $300 billion into the Eurosystem and the Fed has injected $150 billion. We will have more concise numbers later. The Bank of Japan offered to throw in $8.45 billion, the Reserve bank of Australia $4.19 billion, Bank of Canada $1.4 billion and the Bank of Korea just said, “how much do you want?”

The bottom line is the ECB, the Fed and other central banks are flooding the world with money in Weimer fashion. Gold and silver can only go higher.


Goldman again reconfigured its commodity indexes that again lowered the weighting of gasoline, oil, so that is why gasoline has declined in price. The GSCI is changed every time the administration wants lower gas prices. This is rigging the market. They did the same thing a year ago.

What this massive central bank liquidity "injection" is telling the World Markets is that the "sub-prime woes" are not, and have not been, contained. The panic button was pushed last Thursday, and again on Friday. Anybody that believes this central bank "bandage" is going to fix this compound fracture of the World Economic System is a crack head. This bandage isn't going to fix ANYTHING, only delay the inevitable destruction of the US Dollar as the World's Reserve Currency.


Gold is on the launch pad. Friday's hard bounce at the open off the 658 low was a classic. Investors are quickly coming to the realization that Gold is NOT a risky is the ONLY investment. Gold has always been, and will continue to be a "safe-haven" in times of economic crisis. The Gold Cartel is running out of bullets, and the metal itself appears to be sizing up a new suit of armour.

Gold vaulted thru both 663 and 669 Friday before being "capped" once again by dem Rat Bastid Vermin of the COMEX. Resistance at 669 has now turned into support. Should Gold open this morning above 671, the Vermin may find themselves hard pressed to defend 682. 682 IS the line in the sand. I expect that over the next four weeks Gold will clear 682, test the old high of 730, pause to retest the 682 breakout and then vault through the fourth quarter towards $1000 by the Spring of 2008. Please click on the chart above for The Big Picture.

Near term Gold support rests at 663 and 658. Silver on Friday launched a strong bounce and cleared resistance at both 12.80 and 12.96 in the process. There were too few believers however, and at this hour we find Silver stuck back below 12.80 looking up. Silver's 50 day moving average sits at 12.94, and until we get a strong move through that 50 day, and a close above it, Silver is going nowhere. A solid breakout of Gold at 682 would most likely send Silver to within striking distance of 14 quickly. A breach of 700 Gold would give Silver the authority to seek 15 in short order. With the US Dollar about to fold up it's tent, we wait patiently to profit from it's demise.

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