Dollar going down, gold and silver going up
Posted on 17 December 2008 with no comments from readers
Close to zero Fed interest rates mark a new stage in the evolution of the US financial crisis, and the accompanying statement suggested that we may have rates at this level for a long period like Japan in the 90s.
Even the most cursory glance at the US dollar chart shows a double-top and the dollar rally now looks to be definitely over. Given the inverse relationship with the gold price we can equally be sure that the yellow metal will shortly test is March highs again.
Silver up too
Silver has also bounced on the Fed rate cut but generally lags behind advances in the gold price, only to sprint up with out performance later in the rally.
After the nasty dollar rally this summer which decimated many precious metal portfolios this is a welcome respite for investors in this asset class. My prediction of a Gold:Dow ratio of one in 2009 looks a step closer to fulfillment.
It is clear that the US is going to use dollar devaluation as a key part of its recovery strategy, as bond holders ought to realize. At some point there will be a big rotation out of dollar assets and into a currency without government control like gold which can not be printed.
Zero coupon
Certainly there is little point is holding cash or bonds for their ability to earn income which gold can not. Investors could choose to buy equities instead but the economic outlook for 2009-10 is truly awful and price-to-earnings ratios are only a useful guide to share valuations if companies actually continue to make profits.
However, share prices may advance on a more inflationary outlook as bailouts and stimulus packages emerge, and in that case precious metal stocks are going to be the best ones to own, particularly the explorers.
Anybody checking their precious metal stocks today can see how they leveraged the gold price advance on the rate cut last night. This will continue to be the case.
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In fact, yesterday’s meeting, in a certain sense, may have been the
most gold significant event since Nixon’s first devaluation of the
dollar in 1971. The stage has been set for a massive devaluation of the
dollar in the only way it can be done in the fiat money era — via the
printing press. Only time will tell the full implications on a global
basis.
What next?
We have already seen the reaction in the gold market — soaring toward
$880 as this is written. The talk among establishment economists
(mostly of the Keynesian genre) is that inflation can be controlled
down the road by simply draining liquidity at the rate the central bank
deployed it. Life experience tells us though that, once you let the
inflation genie out of the bottle, it is very difficult to get it back
in — Zimbabwe being a good example. Instead, it tends to feed on itself
only worsening until the currency inevitably hits a wall. Wolf puts it
this way, “curing deflation is child’s play in a ‘fiat money’ — a
man-made — money system.” Inflation — and hard, tough, big-time
inflation — is another story. Wolf ends by saying that the result will
be “unexpectedly high inflation though probably many years hence.”
If he is right, we will use gold to cover systemic risk now then heavy
inflation down the road. We stand at the gateway to a new era for gold
– one present gold owners, as well as newcomers, will need to fully
understand in order to accomplish the goal of preserving one’s assets
in what could become even more perilous economic times in the years to
come.
Semper aurum,
Michael J. Kosares