Wednesday, August 10, 2011

Gold Breaks Free, Silver Remains Chained To The US Dollar




“Gold was the investment of the last decade and silver is going to be the investment of this decade.” -Eric Sprott

Few things in the investment world could match the frustrations of a Silver Bull.  The "investment of a lifetime" performs as if lifeless as it's Big Brother Gold answers the call to safety as the World's debt markets begin to collapse under their own weight, taking the fiat currencies that support them down the rat hole with them.

Silver may appear lifeless and adrift here as it teeters up on to the big stage...it is not.

There is no question that to be a Silver investor [let alone a trader] takes a cast iron stomach, and balls of steel.  We are right to be confused by Silver's lack of participation in the Global "Flight to Safety" that Gold is now experiencing.  But is that confusion justified?  Perhaps not.

It is now quickly becoming quite clear that Gold is decoupling from all fiat currencies, and much to Bumbling Ben Bernake's shock and awe, Gold is asserting itself as the Global currency of choice.  That's right Ben, you !#*!ing jackass, GOLD IS MONEY.  Confidence in the US Dollar, and ALL fiat currencies, is no longer simply waning...it is beginning to collapse.  And a "crisis of confidence" in fiat currency, and in particular the US Dollar, is all Gold needs to reach for "Infinity And Beyond".

Gold is no longer swayed by a "bid in the Dollar".  Gold no longer gives a damn about the Dollar, the Euro, or the Yen.  GOLD IS MONEY NOW.  And Big Money is now chasing Gold.

But the question is, what about Silver?

Here is what is holding Silver back...right now, but not for long.  The damn US Dollar.  Shocking, I know, but look at a chart of the US Dollar.  Despite teetering, the Dollar has remained firm and well bid since the announced debt-ceiling increase AND the debt downgrade.
You would be right to ask, "How can that be?"  Good question.

The stock markets did not react kindly to the debt ceiling increase, or the debt downgrade [and don't forget the horrendous GDP report on July 29].  The stock markets have for all intents and purposes, collapsed over the last eight trading days.  Historically, when stocks crash, investors sell-out and and hold cash.  They hold that cash in short-term US Treasuries. [Thus the rise in Treasury prices DESPITE the debt downgrade.]  Us Treasuries are bought with US Dollars.  This creates a demand for US Dollars thus putting an "artificial bid" under the Dollar.  Investors will sort out the cause of the crash "after" they are safely out of stocks and in cash.  Investors will stay parked in cash [Dollars] until they decide next where to put their cash to work for them in the financial markets. 

I hope that made sense.  This scenario in the markets: stocks to cash, cash to treasuries, occurs during most any upheaval in the stock markets...it is normal.  This is why the commodity market has been smashed along with stocks.  Commodities are bought with US Dollars the world over.  A strong Dollar results in weak commodity prices every time.  In many respects, this stock market crash was probably engineered by The Powers That Be specifically to crash the commodity markets, and convince the unsuspecting that Inflation has been contained.

Sadly, for Silver, it has been lumped in with all the other commodities.  It's monetary virtues ignored at this moment in time.  This misfortune is unlikely to last for long.

“To 250 million persons in 51 countries the word for money is the same as the word for silver and silver literally means money.”

-Silver Profits in the 80’s, by Jerome F. Smith and Barbara Kelly Smith, copyright © 1982, ERC Publishing Company, page 43.

Bumbling Ben Bernanke, by guaranteeing the Fed Funds Rate will remain at ZERO into mid 2013, has set in motion the collapse of the US Dollar.  The loss of confidence in the US Dollar that this announcemnt will bring very shortly, will eventually send Silver and all the other "commodities" soaring in a race to catch up with Gold.  It is only a matter of time.


And Silver has been marking time for the past seven years.  In the very near-term, Silver may "appear" lifeless and adrift as the backside of our financial hurricane finally comes ashore and exposes the weakness of all that was propped during the "eye of the storm" from Spring 2009 to Spring 2011.  The reality is that Silver is "right now" poised for a major move higher.  A move higher that may lead to the recognition that the US Dollar's day as the World's Reserve Currency are over.

The Big Picture in Silver tells us that a breach of the $50 barrier will signal the collapse of the US Dollar is imminent or in progress.  All efforts to keep Silver bottled up as EVERY other commodity on the planet has risen to new All-time highs have been to avoid the inevitable...the complete destruction of the global fiat currency system.

A move below 73.50 on the US Dollar Index will light the fuse on Silver.  A move below 72.75 on the US Dollar Index will launch Silver to levels only dreamed about, and forever be remembered as The Day The Dollar Died.

Silver will "nickel and dime" you to death if you stare at long enough.  It's time IS coming.  Patience, the US Dollars days are now numbered.  The countdown on Silver has begun.

By Dan Norcini
Here is the deal - the FOMC is attempting to drive money out of bonds and INTO equities based on the fact that they have guaranteed practically no return as far as yields go on short term Treasuries for at least two years. Think about that. As an investor would you want to lock up money for that long for that kind of yield or would you want to buy stocks and attempt to capture a bit better return on your investment capital. After all, something beats nothing as far as returns go, especially if you think that this easy money policy is going to feed into further asset appreciation as the Dollar further succumbs to the news. Forget about the ECB's quasi QE program to buy up Italian and Spanish debt. The Euro was bought like mad while the Dollar was pounded lower as the Fed is obviously sacrificing the Dollar in an attempt to keep a low interest rate environment in which stocks are rising. That is at least, what they hope to create. I suspect that they are going after higher equity prices in an attempt to gin up confidence in the US economy by creating a rising stock market. What more can I say than YIELD. Here we go again - chase and chase yield.

I would watch the US Dollar very closely right now as a result of today's FOMC statement. I am coming away with the idea that they are now resorting to currency debasement but in a manner in which it is not so obvious as if they had just come out and said, "We are going to do a QE3". They have effectively told everyone that there is not going to be any growth worth speaking of for the foreseeable future in the US economy and that therefore yield on US Treasuries will be very low. They are also now counting on the market to take this idea of slow growth and bid up the back end of the yield curve without fear of the inflation monster. This is going to be an interesting exercise to observe.

Can the Fed manage to induce investors/traders to plow into stocks without having them also plow money into the commodity sector. If Bernanke and company had come right out and announced another attempt at QE3, commodity prices, particularly energy prices would have shot up immediately producing that same dampening impact on the consumer and the overall economy that it did during QE1 and QE2. By taking this line of approach, the Fed is hoping to convince market players that growth in the economy will be so slow that there will be no increasing consumer or business demand for energy and thus no reason to bid up the price of crude oil and thus gasoline. Same goes for food prices. We will simply have to wait and see how this plays out but for today at least, they managed to take equity prices up while taking commodity prices down. After the linkage we have been seeing between the two for both QE's, this is no mean feat.

The Fed are fools if they believe they can "force money into stocks" simply because of low bond yields, and at the same time convince investors that "slow growth" will dampen demand for commodities and keep their prices low.  The Fed has sold out the US Dollar.  Commodity prices will rise regardless of "physical demand" simply because the value of the Dollar is now set to crumble.  Jim Willie explained this well in an essay I posted previously, and post again here to drive home the point:

By Jim Willie CB
The economic theory in textbooks must be updated to account for Fiat Soft Science. An important third factor determines price. It is not demand, as most Deflationist Knuckleheads claim. It is not supply, as the moronic followers of Laffer Curve advocates insist. Instead, it is the falling USDollar since all commodities are priced in US$ terms. Lower demand will not result in lower commodity prices, since the monetary effect trumps all. The twist lies in the pricing denomination units, not in the Price Demand dynamics. An inflationary recession is deeply rooted in progress, with a depression next to occur. The price effects continue to confuse the challenged economists who have actually foreseen almost nothing in the current ongoing crisis...

The honorable T-Ferguson pitched in with a comment that sets the tone. He said, "Remember Econ 101. Increasing the supply of an item decreases its value. More dollars equals a less valuable dollar. A declining dollar causes all things denominated in dollars (gold, oil, corn) to rise. The dollar is going to be declining farther with the advent of QE3. So the way must be prepared by smashing commodities first, so that they start their next upleg from a lower point. Thus, the fundamentals are overridden." Neither the demand siders nor supply siders can observe that the USDollar itself is subject to Supply & Demand dynamics, with the commodity prices as victims. The bad science artisans focus only upon Supply & Demand for the commodity, steeped in myopia. Note tragically that wages have not risen during the hyper-inflation episode that began with Quantitative Easing.

Turn to my colleague and friend Rob Kirby, who always has deep insight. The Jackass yields to Kirby as a smarter expert on monetary and bond matters. He helps to comprehend the failings of the Knucklehead gang. He said, "If those Deflationist guys had any sense at all, any economics knowledge at all, they would realize that if deflation were in progress, the interest rates would be much higher. Instead, the cost of money is near 0%, which goes hand in hand with hyper monetary inflation. If cash money was dear, then the price of money would not be free. It would instead be higher than say 8% or 10%, since it would be valuable. Today, money has been trashed in a grand debasement process, where money no longer has value. This is utterly basic." My response was thanks, but such basic points are way over the heads of Deflationist Knuckleheads who are focused only on the wrecked housing market and falling final demand generally within the USEconomy.


Posted by FT Alphaville
By keeping the Fed’s target rate at 0.00 per cent to 0.25 per cent for the next two years, he’s made holding stocks much more attractive. After all, anyone holding a 2-year Treasury will suffer a negative real rate of return, therefore will scramble for yield. RBS US rates strategist Eric Hiller put it this way right after the statement:

So, we know front-end yields are essentially anchored for 2-years and investors will scramble for yield and will compress all sorts of volatility measures and spreads. A month from now, we’ll all ponder why we waited so long to buy risk assets, buy the belly and sell rate volatility. Currencies can continue to gyrate and long-term rates aren’t anchored, but the 2-year note is gone, a function of deposit demand and cash withdrawals rather than policy expectations…

Though there’s more to it possibly. There has to be! The Fed has signalled low rates forever already, practically.

Anyway, if you go back to Bernanke’s famed 2002 speech on how central banks can curb deflation, you get some familiar hints:

One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time–if it were credible–would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields…Familiar but you can see how the logic of making it work, quickly leads to hitherto unimaginable ideas on reducing long-term rates.

...too late to buy into gold and silver?
Just a quick comment on whether it's too late to buy into gold and silver or whether or not you should take some profits. The reason to own gold gets stronger everyday. Take yesterday for instance. The Fed has guaranteed zero interest rates for 2 more years. Real interest rates (nominal rates which are zero - less the inflation rate) will be negative for at least two years. Gold ALWAYS ALWAYS ALWAYS goes hgher when real interest rates are negative. Always. Negative real interest rates are like rocket fuel for gold/silver. So the Fed has now guaranteed higher gold for at least 2 years. Wait until QE3 kicks in...

By Greg Hunter
The gold market has been hitting one new all-time high after another because of past, present and future money printing. I think big money is panicking into the gold market for safety. Sure, the Treasury market is the biggest and most liquid on earth, but how safe is it when the U.S can print trillions of dollars at will to pay its bills?



It is not the small investor that’s causing $50 a day spikes in the gold price. Hedge funds, sovereign wealth funds and central banks are the ones doing the buying and shooting the gold market higher.

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