when numerous asset groups are discussed, and many are seen as lacking in their fundamentals and future prospects, they will seek alternatives
and gold is being sought out
I suppose on this we will not ever see agreement
so be it
I appreciate your views
I made reference a few times to the "25 Reasons Why Gold Will Rise" article
in it I made a strong case for the USDollar Decline Vicious Circle
I had no intention of repeating the thesis and dynamics
an article can build upon the previous, without need for repeating the same points
maybe I should have provided a stronger review for the dollar gold mechanism
as the dollar suffers, gold will benefit
this much is assumed, and if not, then the problem is yours
not mine
gold competes directly with USDollar as world monetary standard
the dollar is the official standard
gold is the counter-currency standard
so here are several references where the dynamics were clearly stated...
below should be enough
I will not defend the article any further
if you cannot see the arguments, evidence, and stated dynamics, then you might not be reading carefully enough
how much more detail do you want?
better yet, why not take a stab yourself?
and submit it to www.321gold.com
several clips:
A dollar crisis is building, since no protection feedback mechanisms exist or operate at this moment. The overvalued dollar is correcting in value, even as its supply is accelerating. The monetary mechanism is being impeded by Fed intervention (prevent rising longterm rates) and the industrial mechanism has long been absent (offshore mfg in Asia and Mexico). No defense stands to protect the dollar, whose declines will set off a vicious circle.
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A burgeoning trade gap, a dangerously escalating federal deficit, and pre-empted negative real interest rates are of greater importance, easily eclipsing the more public spectacle of Middle East tensions. This much goes without question to any serious student of gold and the dollar. As Stephen Roach points out, the US current account deficit was $40B in the month of November. We are on pace with a trade gap approaching 6% of the US GDP. Now the service sector is experiencing rising imports, a new development. Bulging deficits of this magnitude should next lead directly to big concessions in USTBond, US equity, and USDollar valuations.
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The gold rush has more dominant roots in the progressive failure of the post-bubble US financial asset markets, the debt-suffocated economy, and the faulty monetary system founded upon a debt-backed reserve currency. The gold rush finds its origin in a dangerously overvalued USDollar, coupled with discouraging fundamentals and extreme imbalances in the USA Inc "stock share." Consider basic theory of the firm. We have a national stock share with a hemorrhage of rising losses (trade gap), guidance of growing future losses (budgeted federal deficits), dividend below zero (negative shorterm real interest rates), uncontrolled new share issuance dilution (expanding money supply), a labor force suffering from fatigue (household debt), slumping product demand (excess capacity), large foreign ownership (hostile share holders), fraudulent financial books (raided Social Security Trust Fund, no Gold Reserve disclosure), and deceptive reporting (economic aggregates). Conditions are perfect for severe devaluation. If this were a company's stock, it would be in single digits facing a painful debt downgrade. This article addresses from a higher level, without a flood of data, what the major roads are that now deliver surviving capital toward gold during a frightening time when monetary system fractures are emerging and capital is tragically being set ablaze.
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The press & media declare Gold to be the true "counter-currency," as it has resurrected from a 20-year exile of neglect. Rick Santelli aptly describes it as such on his morning CNBC segments covering bonds, equities, and currencies. Gold, the financial commodity, is embraced by those who defiantly forego dollar-based financial securities, last decade's successful asset classes. The Wall Street Journal remains hidebound on the gold topic, as do Barrons, Investor Business Daily, and the New York Times. Not surprisingly, their advertisement sponsors have no loyalty to precious metals. The charming Santelli might be one of only two or three people on the CNBC staff (excluding guests) who have anything intelligent to say. Their Economics editor Steve Liesman shows signs of comprehension, citing gold not only as a currency alternative, but a beneficiary to worldwide currency supply expansion. Gold has begun to benefit from recognition as a currency, breaking ranks from mere commodities, and now is emerging from the shamed role of a demonetized metal.
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US TREASURY DEBT SECURITIES:
This market is five times larger in size than the US stock market. The shorterm yield on the 3-month TBill is a paltry 1.2%, which fails to cover even the reported price inflation. Negative real rates have ranked as the primary sentinel signal heralding a new longterm bull market in gold. This more liquid source of money helped gold to reverse off the bottom in autumn of 2001 when the Federal Reserve began to take down the FedFunds target rate below 2%. It diverted money toward gold with more vigor after the Fed reduced its target in November 2002 to 1.25% in an act of concealed desperation.
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CHINESE AND RUSSIAN CENTRAL BANKS:
China is running a huge trade surplus, with the United States the largest component. Evidence provided by the Prudent Bear Fund indicates that increases in Fed printing press volume and consumer debt match with increases in China's trade surplus with the US. Last summer Chinese leaders announced publicly their intention to diversify their current USTBond reserves evenly across our TBonds, EuroBonds, and Gold.
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Many critics are now urging a yuan upward valuation. They devote little thought to the consequences of having their demand granted. Some experts in the currency markets fully anticipate a higher valued yuan would immediately precipitate a USDollar decline acceleration. Asian currencies would all revalue to higher levels, with an eye set on competitive rank with respect to the Chinese currency. All Asian import prices would rise in lockstep when this occurs, setting off import price inflation within our shores, a rise in longterm USTBond yields, further crimping US economic growth in a world still overly dependent on US-centric growth. Gold would correspondingly accelerate upward during this dollar deterioration.
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ARAB PETRO-DOLLARS:
The World Trade Center attack marked the calendar with a clear watershed event. From an Arab perspective, they must deem their money invested in the United States as no longer safe and secure, even subject to being frozen. The press reported unofficial figures of $500-600 billion in US investments repatriated to Saudi Arabia (more likely to European banks). A big source of steady capital flow lies in petro-dollars. OPEC oil is priced in dollars, sold in dollars, paid in dollars. Those dollars are not staying put, moving out of assets denominated in dollars quickly. The established pattern of recycling may have ended. The recent 10% move in the euro currency relative to the dollar since Thanksgiving is striking evidence that petro-dollars are now being converted into euros and EuroBonds. Imported petroleum sales to the United States total eleven million barrels per day, times $30/bbl comes to $330M per day in revenue to the world market. Of this amount, about 40% goes to OPEC, almost 20% to Persian Gulf producers. These are extremely large daily capital flows, no longer loyal to our financial markets.
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FEDERAL RESERVE MONETIZATION:
The Fed effort to thwart the powerful forces of monetary deflation and its associated price deflation (not to be confused) will bring with it some unplanned and unexpected consequences. They can purchase Trez debt, or corporate debt, or S&P contracts, but they cannot control where the money from those purchases goes. Right now, a credible argument can be made that a siphon directly captures large sums of newly created fiat currency for the benefit of the Chinese banks. Additions to money supply, increases in consumer debt, and changes to Chinese trade surpluses all equal roughly the same number. That was certainly not intended by Bernanke, and probably angers him. They cannot control where money goes, as seen in the 1999 stock bubble. Published figures cite $20 billion in new money printed per month, which far exceeds the rate of expansion of the economy.
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JAPANESE SAVINGS:
The Japanese people are the most prolific savers in the world. Their recorded personal savings is in the neighborhood of $11 trillion. Since early 2002, they have discovered the benefits of preserving capital in gold. Hanging on with cash in yen or with investments in their Nikkei stocks would have resulted in deep wounds. Recent TOCOM data suggests the spring 2002 gold metal frenzy may be in the process of resuming once more. The Japanese economy enjoys a trade surplus versus the United States equal to 2.5% of their GDP. The USA suffers its largest bilateral trade deficit with Japan. Hence, fundamentals dictate both a rise in the yen and a fall in the dollar, generating a capital flow that will be formidable to prevent. Do their exporting companies continue the mindless recycling into US Treasurys? Do their private citizens continue to toss valued savings into stocks, which either depend on America's endless consumption or are closely aligned with "walking dead" keiretsus (conglomerates)? Pensions for govt workers are already forced by law to invest in sub-1% bond funds.
Many of its people are totally fed up with the revolving door of coalition leaders, their indecision, and the same old same old senseless federal projects. They are deeply frightened by a federal debt amounting to 140% of their GDP. Their competitive future among other Asian exporters is darkening. China is taking markets away from Japan, offering much cheaper labor, while Japanese firms rush to invest in industrial capacity within the mainland Chinese economy. Threats abound for the Land of the Rising Sun. So bad is the monetary situation, that lenders are now offering slightly negative rates of interest! I kid you not. Plenty of motive exists for continuing to sock away money into gold, as this former beacon in Asia declines in wealth, power, stature, and influence. Although fading into oblivion, Japanese citizens are chock full of hard cash, which they have shown willingness to chase a traditional favorite in gold.
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NEW UNITED STATES GOLD-BACKED DOLLAR:
Jim Sinclair has taken the courageous stance of openly advocating and predicting an eventual gold-convertible USDollar. Necessarily, the present USDollar must either go through a near-death experience or be formally retired. I believe it will be retired in the face of a magnificent worldwide monetary crisis, with our declining abused bloated indebted currency at the epicenter, around which a strained global system revolves, saturated with dollars. I have elaborated in my first article upon the monumental forces and dynamics behind the USDollar Decline Vicious Circle. As the dollar declines in value, the many unchained powerful feedback effects will show the way to further declines. Review the article (see ref#1) for a more detailed discussion of complexities. The key to the phenomenon lies in the dynamics of change. Many naïve observers of the economy and financial markets hail the onset of a lower dollar. But to their peril, they overlook how devastating the declining effect is on every facet of our economy and markets, as well as the world economy. The stock market, Trez bonds, corporate bonds, inflation rate, mortgage rate, supplier costs, import prices, energy costs, corporate profits, consumer spending, refinance cashouts, economic growth -- all these are detrimentally affected by a declining dollar. The vicious circle works like a revolving weapon, issuing blows to each listed economic factor with each repeated cycle. We simply depend too much on foreign capital, to the tune of almost $3 billion per day. I believe the destructive cycle will not end until a crisis develops and mushrooms. Each cycle ratchets up the destructive force, ensuring the next cycle's inevitable arrival, leading to a crescendo in the near future.
/ jim |
