Tuesday, April 5, 2011

Gold And Silver Got Nuts Again

Anyone bother to ask why?  I saw this headline a few minutes ago on cnn.com: "Oil, gold, silver are 'uncertainty magnets'."  The is pure b.s.  Oil, gold and silver are "magnets" for all of the paper currency that has been, is being and will be manufactured by global Central Banks and Governments.  If there is "uncertainty" out there, it is derived from the instability of fiat paper monetary systems and the real fear of not knowing how extreme CB and Govt monetary/fiscal policies will become.  It's really that simple.

The biggest source of instability and uncertainty is right here in the United States and is reflected in the value of the U.S. dollar - a currency that may be approaching a state of collapse.  Eric King posted an excellent piece from Faros Trading on his blog last week.  The Faros guy points out that OPEC countries will take in $1 trillion in dollars from oil sales this year.  He also points out that these Arab nations have no interest in keeping these dollars and have been aggressively stepping in front of the Chinese to swap them for euros.  Here is the LINK  It's really a must-read.

The highly respected and well-weathered Richard Russell also posted commentary on the potential for the dollar collapsing today on the King blog.  You might not know who Faros Trading is, but trust me that Richard Russell is someone who has been around longer than just about anyone.  Here is RR's thoughts on the subject:  LINK

Gold and silver are moving a lot higher here, despite the headwinds being tossed at them by the idiots in the media, because the possibility U.S. dollar instability, and even collapse, becomes more real by the day.  The thing about whether or not QE3 will happen has become quite a boring debate in my mind.  If someone can explain to me how the Government is going to finance its Treasury issuance if the Fed printing stops at the end of June, then I will accept that we will not get QE3 in one form or another.  But here is the latest proof that the Fed has been largely responsible for keeping our Government funded since the start of the QE program:  This comes from http://www.zerohedge.com/, which has done a great job of tabulating the Fed's accumulation of new Treasury issues:  LINK  The fact of the matter is, per zerohedge's accounting, the Fed has provided 83% of the Treasury's cash since QE2 started:  LINK   While I'm willing to believe that our policy leaders would like to stop the printing presses, until someone can show me how the mathetics to keep the Government funded without QE3 will work, I'm still confident that QE3, in some form - overt or disguised - will happen.

I will leave you all with the comment of a close friend and advisor to our fund.  This is someone who served as the director of the Denver Branch of the Kansas City Federal Reserve Bank for six years.  In other words, he has valuable insight into the "thinking" of the Fed:
The Fed will pay lip service to stopping at QE2 but there is no way to unwind at this point given the economy and they will go into QE3 and use Japan and Middle East as cover for it..........there is a huge problem creeping up around forex carry trade that will need to be unwound concerning the Yen
This is why gold and silver are going higher.


  1. Good stuff.

    James Rickards in his latest KWN interview talked about the Fed being able to monetize the debt even if they end overt money printing. The Fed's balance sheet is that big. He called it "The stock is the flow" or some such Fed jargon.

  2. You are so smart Poopy.

  3. Ya I heard the Rickards interview and I disagree with him. I believe he's assuming there won't be any new additional debt issuance, which is impossible with the budget the way it is AND he does not pay heed to the "off-budget" expenses (FNM/FRE/war on terror) AND he assumes the Fed can sell toxic assets to raise cash to roll into Treasuries. I believe he is wrong.

  4. My comment about wanting to see the math on paper is specifically directed at Rickards.

  5. Dave, could today's rise in Silver & Gold have anything to do with the possible shutdown of the US Govt.?

  6. Where's Prechter? Anyone know? Has he unplugged his 900 numbers and fled the country? Where are you Bob?

  7. LOL Joe.

    Mammoth, I doubt it because I don't think anyone seriously believes that Congress will let the Govt shut down. Hell, even the Republicans want their paychecks and medical bennies. I think today's action is derived from what I wrote about today

  8. Dave, your post is the best explanation I've seen to today's action in the gold/silver markets. In addition to the reasons you cited you think the action today was frontrunning the Euro Central Bank's rate decision on Thursday?

  9. I think the metals are reflecting the probability of continued printing by both the US and Europe.

  10. Dave,

    What are your thoughts on SVL.V and SLX.TO?


  11. "there is a huge problem creeping up around forex carry trade that will need to be unwound concerning the Yen"

    I take this to mean the usd/jpy is going to go back down and possibly take out 76. Is this what he was getting at?

  12. dfly, i have not looked at those two names. the chart on svl looks good. the chart on sxl looks crazy. i'll take a look and let ya know if i buy them.

    anonymous: not sure on ultimate technical levels of the usd/jpy. i think the point is that there's a flood of dollars held by china and OPEC that are now competing to get out of dollars and into euros and yen.

  13. Thanks Dave. I appreciate it!


  14. Dave,

    Two issues that I see with your analysis.

    1. Bank of Japan is printing yen too..they are pumping money like crazy in the aftermath of their earthquake, tsunami and subsequent nuke disaster.

    2. Eurozone has its own debt structuring problems and all the countries requiring bail-out (PIGS) mean that the stronger economies (like Germany) need to suffer inflation. The struggle is across these nations and it looks like it is as significant if not more than the USD.

    What's your justification on the above 2 points? What is so significantly superior about the other currencies that makes you think that USD will be the first domino to fall?

  15. Dave,

    Ciao. Cosa fai? Sta bene oggi?

    You asked a last week if I had any insight on when the dollar may break? Forse molto presto. Look. You are way better at this stuff than I am. I just try to keep an eye on the big picture which has been developing for over a decade now and accelerating, apparently.

    But, honestly, I know there are alot of gold bugs waiting for this event like it's the second coming to their gold portfolio. That's fine so long as we're aware of its consequences on our daily lives. A big sudden drop in the dollar will result (I think) in a violent corresponding reaction in tangible goods like gas, food etc. Not pleasant. It'll sting for sure.

    The good news is (and I'm not sure you're planning on this) we may experience a potential violent reaction in the dollar in the opposite direction which may quell inflationary pressures for a bit. If that happens, the PMs are sure to take a licking. I suppose all of this depends on whether the dollar moves down quickly and the nature of golds reaction thereto. Big swings in one direction usually invite big swings in the opposite direction (as you know:).

    I'm getting the feeling this is Janaury/February 2000 when the NAZ went parabolic before reaching its blow off top. The difference is this is not the final top in gold only temporary. But, this top could last for many months. We've been spoiled:)

    Love your thoughts. Che ne pensi?

  16. Anonymous re: USD/euro/yen. Very good question. They are all flawed. $/yen/euro/C$/A$/SF/yuan/peso/etc. We are in the middle of the perfect the storm. The classic von Mises global fiat currency race to zero. They all are flawed and they all are being printed like crazy. Even with the Chinese raising bank rates, they are still printing yuan. That's why the yuan doesn't double vs. the dollar.

    At this stage it's a question of relativity and practicality. The US$ is the worst of those currencies because when you factor EVERYTHING, the U.S. is in the worst shape of the major countries. I have posted about that many time here.

    Eventually everyone will race to sell paper and move into gold/silver/oil/maybe land/commodities/etc. The Chinese have been strattegically accumualating gold and silver at a remarkable rate without driving up the price too much because Europe and the U.S. have dishoarded their gold. That will change in good time and gold and silver will catapult much much higher.

    If you can source some James Dines newsletter from 2000-2001, those are very good texts to use to read about what is happening now. If not, go read von Mises.

  17. Ciao Gallo. Sto bene questa mattina, ma un po' stanco. E tu? Molta bene domanda.

    See my answer above for part of the answer. I see your point about goldbugs who might construed as "grave dancers." But here's the thing: Most of us who started buying into gold and silver 10 years saw what was coming and we tried to warn as many people as possible. No one would listen to me until recently.

    I was at a party last Labor Day weekend in my old 'hood. There were at least 3 or 4 different people who came up to me and said "duuude, you have been 100% right. How do I buy gold and silver? What do you think will happen now?" These were people who thought I was insane back in 2002/2003. They were people who said i was an idiot for selling my home in 2004. Now they want my views and they are all in negative positions on their mcmansions.

    But there's no glory or satisfaction in being right about all of this. We are in the middle of a historical human cycle that is unstoppable and like unpreventable. History rhymes and repeats.

    This counry is doomed. It's only a question of how long and how brutal the unwind is. At this point I'm more worried about a global nuclear conflict developing. Every other instance in history in which great empires collapsed, a world war of some sort unfolded. This is the first time many countries have been capable of destroying the earth with nukes. I'm serious about this.

    Many people have left this country thinking they will dodge what is coming. But it will be ugly everywhere. The U.S. imperialism will ensure that. Look at what Rome did when it was in collapse. It went out and tried to conquer the world. So did Germany. Etc...

    I don't what the timing is on all of this and I don't know what things will look like. I just believe what is coming is unavoidable. Gold and silver will enable the holders to at least enjoy as much as they can while they can. I don't know that I'll want to see what "the other side" will look like.

    Mi dispiace. Questo é cosa é

  18. Love the content Dave! Terry from Minyanville

  19. Привет Дэйв. Я очень хорошо сегодня утром, но немного устал. А вы?

    At one point in time, I believe a Ruble was worth approximately $1.00. I still have some 20,000-Ruble notes that I picked up in Russia back in the 1990’s that I keep as a reminder of what we need to provision for. We should have no illusion that the same thing can not happen here in the US.

    As far as global nuclear war goes, Dave – I think the danger of MAD (mutually-assured destruction) between Russia and the US has disappeared. However it is plausible there will be a nuclear conflict in the Middle East – which would impact every nation that uses Oil.

    But back to yesterday’s discussion – let’s see where PM’s go on Friday, in reaction to the Govt’s action to shut down or not to.

    Благодарю вас за все ваши добрые работы здесь.

  20. Dave re: USD/euro/yen

    See this link: http://boombustblog.com/reggie-middleton/2011/02/04/is-another-banking-crisis-inevitable/

    European banks are highly leveraged compared to their US counterparts (11.1x versus 4.1x) and are undercapitalized with core capital ratio of 6.5x vs. 8.5x.

    lol - There is no need to read Mises or James Dines to figure out all fiat currencies will fall and die. I am not arguing on that point.

    To me - there's enough reason to believe that each currency (euro/yen/RMB) has its own share of problems that are as severe or more than the USD.

    The fact that USD exists today as world currency could turn out to be a saving grace for the dollar, because all these countries hold dollar reserves. Sure they can shed them, but they can also shed world trade along with it. So this charade can continue much longer than one can think.

    If you can point me to other posts where you have reasoned why USD will be the first to fall, that would be helpful. The reasons are also constantly changing with world dynamics, so it is hard those reasons will remain the same now.

  21. The world is getting rid of the dollar as the reserve currency. European banks have a higher degreehonest accounting than do U.S. banks so Euro banks may look worse on the surface. BUT A lot of U.S. bank assets are off-balance-sheet and a lot of it is at the Fed and needs to be moved back on-balance-sheet. I've been reading Reggie for several years and with all due respect, he does a great job of patting himself on the back. But I believe my knowledge of high level, complex accounting is greater than his.

    The world is trying to unload the dollar as the reserve currency. Russia and CHina already conduct a substantial portion of their non-US trade in the respective currencies. Argentina a and Brazil, major trading partners of the U.S., conduct their trade with each other in their respective currencies. You can google those statements if you need proof. I have wrote about it on this blog over the past 2 years.

    The fact that the dollar is still used as a reserve currency is a negative ultimately.

    Feel free disagree with me, but time will tell who is right. I don't have time to debate this.

    The world is moving toward creating some kind of hard-asset-backed reserve currency. If you wathc what China and India and Russia are doing, you have to conclude that gold/silver will likely be the hard-asset backing of choice.