Capitalism is a failure and the worst thing to happen to humanity.

From Matein Khalid writing in the latest issue of MoneyWorks:

In essence, we are on the brink of the most aggressive expansion of the US national debt in modern financial history at a time when its four major foreign sovereign creditors have minimal incentive to roll over their short-term Treasury notes. A crisis of confidence in the bond market and the US dollar as Obamanomics revs up deficit financing is inevitable. This is a compelling argument to own gold, particularly if Fed Funds remain zero while the CPI creeps higher, meaning US dollar rates will go even more negative. There is a time bomb ticking on in the US Treasury bond market. When it explodes, the dollar will lose its safe haven status.

A Democratic Congress does not plan tax rises or spending cuts to finance Obama’s US$860 billion stimulus because the US economy is in a recession. This means that a borrowing binge is inevitable. Foreign investors, primarily Asian central banks, own US$3 trillion in US Treasury debt. If oil prices fall to US$30, Saudi Arabia could even face budget deficits, removing the petrodollar recycling trade into Uncle Sam debt.

It is only a matter of time before the US loses its AAA credit rating as Social Security and Medicare costs escalate while the baby boom generation – the largest, richest in history – retires. This debt spiral and risk of a US sovereign credit downgrade suggest that faith in the global dollar paper standard cannot survive. Unlike the dollar, gold is a currency whose value cannot be manipulated by any central bank, particularly Helicopter Ben’s printing machine.

The European Central Bank is intransigent and its money market rate is 2.5 per cent when the Fed Funds rate is zero. I am convinced that the long dollar, safe haven trade since September (the bring money home, get me out deleverage trade) is now over. Geopolitics and the wars in Gaza, Iraq and Afghanistan will also anchor gold prices. Deficits, the debt explosion, zero interest rates, the dollar’s loss of safe haven status and Middle East geopolitics all convince me that US$1200 gold is inevitable.

@ Peter:
Thanks for your continued commentaries on gold.

Matein Khalid’s commentary (see above), coupled with his logic and factual data, constitute a compelling argument for all of us to own physical gold. Unfortunately, many folks around the world will flock to “paper gold”, which is a very poor substitute, since it is manipulated by central banks, particularly the US Government and it’s agents.

These “agents” of the FED, namely JP Morgan, HSBC, Citi, and B of A, have made, and continue to make substantial profit by shorting paper gold and silver in what is secretly referred to as the “gold carry trade”. Collectively, these 4 agents of the FED (called bullion banks) hold 99.5% of all precious metals derivatives positions held on the fraudulent COMEX. The specific holdings, as of late February, 2009 were:
- JP Morgan 78.5%
- HSBC USA – 19.1%
- Citigroup – 2.0%
- Bank of America – 0.3%

Clearly, JP Morgan is the main culprit here, and ironically, they have the audacity to brag about it. As Ed Steer (from Casey Research) said recently: “any questions?”

I agree, all aboard!

Peter Grandich notes we now have a classic bullish reverse head and shoulders formation. The right shoulder may need a little more work before taking out the neckline at $1,000, but when combining the fundamentals with the technical picture, we have to love gold’s chances for more upside to the US$1200-US$1300 region.

From JSMineset.com today:

If we observe the $USD graph for March 2, 2009, we see that the USD has just broken above the resistance level of 88. Will this mark the beginning of a new run higher in the U.S. dollar? Currently the U.S. dollar is benefiting from the propaganda of other countries (i.e. China), political games, intervention ofthe Exchange Stabilization Fund, and the foolish actions of the Bank of England [BOE] and the European Central Bank [ECB] which have caused Europeans to flee the Euro and the Pound Sterling.
However, fleeing the Euro and the Pound Sterling for the U.S. dollar is akin to fleeing the Lusitania for the Titanic. All three currencies are sinking ships and fleeing one sinking ship for another sinking ship is just not intelligent and is destined to end poorly for all involved parties.
Therefore, I believe that this subsequent “breakout” above 88 will be short-lived. While the U.S. dollar may meander higher for a short-time longer above 88 as the U.S. Treasury and the Exchange Stabilization Fund reach deeper into their bag of monetary tricks, I do believe that when it breaks back down below 88 sometime shortly, the retreat will be marked by periods of extreme volatility and rapid decline.
On a subsequent decline below 88, which in my mind is imminent, I have noted an important level of intermediate resistance at around 81-82 in the above chart, as this was the floor that existed for three years before the USD plummeted below it in 2007.
If it breaches this level, the next point of resistance would be at 76. If the USD breaches 76, then the bottom would be anyone’s guess at this point. This breach may take some time to develop, but right now, I would have to say that the dollar’s breakout above 88 is likely to be a false breakout.
However, my belief in a sharp, and at times, violent decline in the dollar’s not-so distant future is not based upon the above technical analysis so much as the political clues that are beginning to slowly rise to the surface in not so aboveboard comments made by other nation-states. So even against the unsound and increasingly risky Euro and Pound Sterling currencies, betting on the U.S. dollar is still a very risky play at this juncture.

So I cash in my ISA’s (in sterling) to buy dollars to buy gold at $1000; the price of gold increases by 20%; the dollar drops by 25%; and the net result in sterling is …

Do you really think the fall in sterling is over? One pound to one dollar was the 1970s rate. But you are right to highlight the problem of the US devaluation – against which currency?

However, against gold and silver the US dollar will certainly devalue as it is ‘printed’ while gold supply is fixed by production constraints. My brother turned his sterling into gold two years ago and is laughing all the way to the bank.

> So what is holding up the US dollar? Why has it rallied
> recently against every major currency?
… and …
> against which currency?

Do you count sterling as a major currency, then? Your implication is that you believe sterling will fall even faster against the euro (and whichever others you regard as “major”). So what do you suggest us poor holders of sterling savings do? If we buy gold now and sell it for euros later we still have the problem, because the dollar is so strong at the moment.

I find it difficult to believe that inquiring minds think the Sterling won’t fall hard. I believe the fall in the Sterling is far, far from over; and I’m looking for parity (Sterling/USD) before spring of 2010.

Regarding the USD:
Yeah, it’s in the toilet. But of all the “maidens” in the land, it’s the “least ugly.” That fact, coupled with the fact that all the printed USD has not yet made it into the US economy leads me to believe that the USD’s fall in 2009 will not be a precipitous one (though it certainly will fall at a faster rate by mid 2010). Though gold & the USD have started to decouple a bit, as the USD falls, gold will continue to rise.

Regarding comment 8. – buy gold – it will rise against all currencies including the euro.

Here’s the thing. I’m just an ordinary bloke who happened to stumble across this blog. I’m not a sophisticated investor, I have no particular connection with the markets, all my life I’ve just followed the standard advice like a good boy and now I’m watching my ISA’s and pension pot tanking and my cash savings suddenly generating bugger-all interest (I downsized my house a couple of years ago, so I have a chunk of cash sitting in the bank). And now that the government is printing money, oops, “easing quantitatively” we have the prospect of serious inflation in a little while. I’m terrified that everything I’ve worked for all my life will turn to dust. What do I do?

Given that my few forays into the stock market have been less than totally successful, what are my other options? Lots of people are saying “Gold”. Thing is, it sounds dodgy to me — first, it’s priced in dollars, so I have the exchange rate thing. Then, don’t I have to pay VAT if I buy gold? So I’m immediately down on that. Then, if I don’t physically own a bar of gold, whoever *does* physically have it could steal it, or go out of business, or sell it to somebody else as well as me. So the idea of gold is worrying too. Or have I got it completely wrong?

Thanks, your email address looks like a spam but this comment suggests otherwise. You will not pay VAT on a gold ETF and I would not worry too much about who holds the gold in the ETF. Buy GLD on the NYSE and you should be fine, and if you end up with capital gains tax to pay that is surely a sign of success! But do sell out if prices suddenly double.

Thanks for the reply, Peter. I don’t want to hijack this comment thread, and appreciate your time. And no, this isn’t spam, I “personalise” the email address I give out to websites so I can tell if they sell it on, in which case I can easily block spam.

To complicate matters (from comment 11), I’m in the process of leaving the UK to live in a Euro-zone country. I’m still worried about the issue of the exchange rate. The dollar is strong against the Euro at the moment, but could well fall back (according to many commentators) which would erode any gains made by gold. Are there sterling- or Euro-denominated EFTs? If I ended up with CGT to pay that would be a happy problem, but not if the exchange rate had wiped out any real gains.

No with a commodity priced in dollars the exchange rate risk would be too high for a non-dollar ETF. I think you are still better off with gold as none of the currencies has an attractive outlook, while gold and silver do. If you spread your risk as widely as possible that might be the best option if you are unconvinced.

@ xmfclick:

My take is this:

1. Peter gave you good advice.
2. when dealing with currencies, we have to take several factors into consideration.
– first, how do the currencies compare to eachother (based on economic outlook, etc. etc.)
– second, if all currencies are ugly (yes, they are all ugly!), then which is least ugly?
– third, in the currencies markets, there is always at least “One Bull”
– fourth, the current currency bull is the USD
– fifth, if all currencies look ugly, then they will trade poorly vs. gold

3. So is it any wonder that gold hits all time highs in all currencies except the USD?
4. In my opinion, the USD will maintain its strength in 2009; beyond that is the problem.

As I am resident in Bahrain, I’m paid in BHD which is pegged to the USD. Over the past 10 years Sterling has had an average exchange rate of 0.7BHD. At the moment it’s around 0.5BHD. Is it reasonable to assume that in the long run Sterling will pop back up to it’s 0.7BHD average? If yes, wouldn’t it be a good idea for me to buy Sterling at this point?

Yes – but sterling should weaken to one:one – very difficult to get currency right, gold looks more stable!