Wednesday, September 9, 2009

The U.S. Dollar Is Now Officially In Trouble

In an article published Sunday by the Telegraph-UK in London, and the content of which was not to be found anywhere near the mainstream media in the U.S., a former high level Chinese Communist Party official spoke quite candidly about the steps China is taking to protect itself from the catastrophically reckless fiscal and monetary policies being executed by the Fed and the Obama Administration:

"Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing"... If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.   China's reserves are more than – $2 trillion, the world's largest.  "Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets."   Here's the link:

China Alarmed By US Money Printing

Basically, through Cheng Siwei as an emissary of sorts, China has made three definitive statements:

1)  China has lost its patience with the U.S. fiscal policies and debt accumulation
2)  China has been, is and will be dumping U.S. dollars
3)  China is accumulating a massive amount of gold

With this in mind, let's take a look at a daily chart of the U.S. Dollar Index.  You will see that the dollar has now lost the line of technical support which was established back in December, when the dollar engaged in a sharp rally higher, although a rally which was not in the very least supported by fundamental factors:

(click to enlarge)

Unfortunately, the U.S. is in an economic and financial predicament which would not allow the Fed and the Government to take the drastic measures required to turn around the U.S. dollar without throwing the whole country into a very deep Depression.   Of course, the very policies and actions being taken to avoid that outcome will, with 100% certainty, lead to the same outcome - only it will be even worse.

This is not lost on Central Banks and investors who are actively buying gold and silver.  Gold is on the verge of making what could be the start of a historic move higher.  For anyone doubting this, would you rather place your bets alongside China, India, Russia and several very large U.S. hedge funds, or on the clowns and bubbleheads rolled out on CNBC and Bloomberg and other media outlets who have been criticizing gold as an investment ever since it broke through $300 back in 2001? One of the world's largest gold miners, American Barrick, has definitively placed its bets on higher gold (see earlier post).


  1. Gold is always attacked because it is not fungible (well, it is on the paper side of things, but leave that aside). Stock runners need your cash at all times to play games, there are no games with the metals, they just are. That's no fun! The scare tactics are always funny. Things like "Gold is only worth what soemone thinks it is; you could wake up tomorrow and it may be priced at $0". And this is different than any other market instrument how?

  2. Actually, if you look at it in the extreme, gold will always have value because you will always find someone somewhere in the world who will exchange a good or service for gold - you can't say that about the dollar.

    I'm hearing Barrick has not yet bought and delivered the gold to unwind its hedges and is having trouble finding $3 billion worth. Will post on it later as I get more details.

  3. Dave,
    that would be very interesting indeed, please update us if you get more information.

  4. Here's the article gyc:

    Technically speaking, I don't agree with the analysis about Barrick settling the hedges for cash rather than physical gold as being a default. I think these contracts were stuctured with a cash buyout.

    HOWEVER, there is, in all likelihood, a correspoinding market short in gold on the other side of the Barrick hedge, in which the counterparty banks most likely leased gold from the Fed and sold a like amount of gold into the market, thinking the price of gold would never rise and that they were covered by Barrick. I would bet that the gold is still leased out and either the Fed will require JPM to go out and buy the gold back and deliver it to the Fed OR the Fed will let JPM off the hook for cash.

    I would bet my left marble that THAT is the case.

    I also agree with Adrian's analysis that there is a global scramble for physical possession of gold going on right now - there are signs everywhere - and that in the near future, the price of gold will explode because of this.

    The days of the paper games in the gold market are coming to a close. There will be a lot of pain felt by some entities who are short. But that's the subject of a future post.

  5. Dave;
    Great find! I am linking to it tonight through your blog. Very interesting indeed.