Tuesday, May 29, 2012

Is The Bell Tolling For The U.S. Dollar?

How did the dollar die? First it died slowly — then all at once...No asset is safe now. The only choice to hedge risks is to hold hard currency — gold (Zhang Jianhua from China's Central Bank) - source of quotes LINK
The economic numbers reported this morning showed continued deterioration in housing and the overall economy.  In addition, consumer and investor confidence is starting to plunge again. 

The Case-Shiller 20 city index of housing showed that the small bounce in housing prices that was expected in March from February was actually a lot smaller than expected.  Year over year for March, prices declined 2.6%.  The year over year number is likely more statistically relevant that month to month, because it doesn't reflect seasonal "noise" the way a month to month measure will.  Also, the Case-Shiller index de-emphasizes distressed/foreclosure sales, so the pricing is skewed to the high side.  In other words, despite the Fed/Govt's attempt to reinflate housing with artificially low interest rates and new programs which enable buyers with decent credit to make no-down-payment purchases, housing is still in serious decline.  It is unlikely that most media outlets will delve into details or report the year over year number, so please do not fall into the trap of buying into the widely pimped idea that housing has bottomed and is bouncing.

In addition to housing, the widely followed Conference Board's measurement of consumer confidence plunged in May.  The prior reading was 68.7, consensus expectation was 69.7 and the actual reading was 64.9.  That's ugly.  Also, the State Street institutional investor confidence index was lower than expected and the Dallas Federal Reserve manufacturing index absolutely plunged from the consensus expectation. You can review this data here:  LINK

The quote above about the death of the dollar is a play on a famous Ernest Hemingway quote from "The Sun Also Rises:"  "'How did you go bankrupt?' 'Two ways, gradually then suddenly.'"  I wanted to include this because I had a conversation with a friend and investor in my fund this past weekend about the timing of the eventual collapse of the dollar.  My view is that the dollar will be held up, while the elitists rape and pillage every last crumb of wealth, for longer than most believe is possible but the collapse of the dollar will be sudden and unexpected by most.

The relevant analogy of what to look for as indications of an impending collapse is one of my favorite analogies of all time from one of my finance professors at the University of Chicago, Richard Leftwich, who likened investors looking for answers to a drunk in who had been sleeping on a bench but was looking for his lost wallet under the street light:  "'Why are you looking over there for it?' - 'Because that's where the light is shining.'"  It's the same thing with the dollar.  The dollar is slowly eroding in value everyday and the signs are all around us to be seen if you know where to look.  But by the time the obvious signal of its demise hits - an outright collapse - it will be too late.  It's the same situation as in Weimar Germany.  On November 13, 1923, many wealthy people had most of their wealth in the bank when they went to bed but woke up the next day as paupers because the German mark collapsed and was devalued away over night, as the rest of the world would no longer accept it as payment.

I bring this up because a news item was announced late Friday evening, after most people has shut their business eyes and ears for the long holiday weekend, that will have significant consequences for the U.S. dollar's reserve currency status.  China and Japan announced that they are going to start directly trading in their respective currencies - the yuan and the yen - and completely bypass using the U.S. dollar as the currency for exchange.  This news report is dated from Sunday, but the first reports hit the newswires on Friday evening:  LINK.  It blows my mind that more is not being commented on or reported about this.  China is methodically and slowly withdrawing from its use of the U.S. dollar. This is a significant step to that end, as China is now the world's largest importer/exporter and Japan is a major trading partner for them.

Most people in this country are completely clueless about what China is doing with regard to the dollar, instead preferring to look under the light that CNBC or their trusty financial adviser shines for them for knowledge on the markets.  Remember, the collapse of the dollar will happen gradually, then suddenly. 

For the relevance of the quote above from the PBOC official, see this article:  LINK  China's demand for gold surged 51% in 2011.  What the article doesn't contain is that in Q1 2012, China imported 138 tonnes of gold - more than half of the total amount hoovered up by China in all of 2011.  I would like to point out that China's gold consumption in 2011 represents about 10% of the total global gold production...Don't let the sudden collapse of the dollar leave you holding worthless paper and no gold/silver...

28 comments:

  1. Housing and sentiment were spun "positively." One spewing head on Financial TV said "The 2.6% decline in housing shows that home prices are still declining but it's not as steep as the prior year." And the horrific consumer snetiment numbers were seen as a pre-curser to GuESS WHAT ?... more money printing which will clearly support the hollow valuations in our Weimar-Zimbabwe markets. As to how long deceptions (like the US dollar,) can go on... isn't Bobbie Mugabe still presiddent in Zimbabwe?

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  2. The wife is finishing her Nursing Degree and has a job prospect in another town. Now we are putting the house up for sale (10% under valuation) at the worst times and in a small college town. (Sure picked the wrong week to give up sniffing glue!) Almost every other house has a For Sale sign in the front yard, I feel like a flower in a vast garden yelling "Pick me, pick me, pick me, please.". Yes, the housing market is not good.

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    1. Dump the Mfer NOW. The whole deal is coming unglued. The US is going to get it going with Syria over this fake Houla massacre as a distraction from the global meltdown. War with Iran/Russia wont be far behind. Housing is dumping another 40% sell now and get physical gold and SILVER.

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  3. Dave, no doubt things could be a lot better and the upside is looking forever away. True, the $US is being lambasted by Ben and Co.

    Thing is, the market has priced this in for what, 3-4 years? The dollar was supped to die in 2010, then in 2011, and then, FOR REAL in 2012...and now the DXY is looking at 88 again if not higher. Question is, what's not already baked in the cake in this point? Honestly, what do you think IT really is?

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    1. No. Dollar was oversold. Due for a bounce. Dollar has dropped over 40% in value vs. the dollar index from when Bush was elected to its low since then. This move right now is 14% off the lows this past decade. Big deal. Hedge fund and institutional money floods into Treasuries/the dollar when things start getting ugly (see the VIX index). Eventually that won't do any good.

      The markets haven't even begun to price in a dollar collapse, especially gold.

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    2. Be careful using DXY as a tool for purchasing power. The Euro makes up a large portion of the overall basket, and the yen gets inflated almost monthly with direct intervention into the FX markets. It is like measuring the length of a piece of elastic with another piece of elastic, there is no true fixed unit of measurement.

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    3. Another article I found interesting this weekend was Iran's alternative to the SWIFT system. Another news story buried in between American Idol, and Dancing with the Stars over the holiday weekend. I just wonder if there is any truth to it.


      http://presstv.com/detail/2012/05/26/243243/iran-designs-alternative-swift-cbi/

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  4. http://weimar.facinghistory.org/content/german-inflation-chart-1919-1923

    From this link you can see inflation was getting out of hand by Jan 1923. Any wealthy German who had not exchanged their depreciating Marks for Francs, French or Swiss, British Pounds or USDollars, or Gold, ended up poorer for it. Contrary to today's pubic opinion, Germans Did have a way to exchange Marks for hard currencies or gold back then. Setting up bank accounts in foreign banks could be done and money could be wired from german banks to foreign banks. Look up the book "The Bubble That Broke the World" written by Garet Garrett back in 1931.

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  5. Dave I own no metal but a lot of Canadian miners that are in gold production. And 2 USA silver producers. Will that work?

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    1. No. You need to own physical gold/silver. Preferably 1 oz. sovereign-minted bullion coins (eagles, maple leafs, etc) and keep them stored under your own watch and guard. The idea is to get your wealth as much as possible OUT of the system.

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    2. Dave, are you now saying that you don't think we should be invested in miners at all? I own 2000 oz of Silver Eagles, 2 oz of Gold Eagles, and a third of my portfolio is in gold and silver miners, between junior explorers, a mid-tier producer, and GDX and GDXJ.

      What do you say?

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    3. I'd go 50/50 bullion/miners. That's the base case model for our fund.

      If you want to be completely protective of your wealth, you have to remove everything from the system and go with physical that you keep yourself.

      IRA's and 401k's are toast unless you liquidate and move to phys. I did that in 2006 at $7 silver and $600 gold.

      Brokerage accounts are risky, but I don't think we're at the point of collapse yet, so I remain that game. It's all a matter of how much risk you want to take.

      Study that risk pyramid that gets posted all the time around the web. That's the model to follow.

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  6. Great work Dave...Oh and look who the new stiff in Town is.

    IMF head Christine Lagarde, who told Greeks to pay their tax, pays no tax

    http://www.tntmagazine.com/news/world/imf-head-christine-lagarde-who-told-greeks-to-pay-their-tax-pays-no-tax

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  7. Hey Dave,

    From time to time, I post your articles+research on my facebook wall BUT when I went to post todays link up, a message came up saying "No link". So I took another route and it said it was spam and that this url is blocked....

    I'll keep you updated.

    Also, if anyone else has a facebook account, could you try posting this link on their wall and tell me what happens.

    Thanks,

    Sicilian Gold

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    1. Interesting. I bet Facebook did something to block my site from being posted because I've been slamming the IPO and Zuckerberg.

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    2. lol

      -Sicilian Gold

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  8. Dave can we get an AUMN update post.

    Thanks!

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    1. Nothing really to update from AUMN's earnings report. If you read thru the latest 10-Q and especially the MD&A you'll know everything I know. I think the big question is when will the equipment they need to ramp up production at Valerdena arrive from Argentina. I don't think know specifically other than some of it is loaded on a ship and some of it is waiting to clear customs.

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  9. And now, as predicted (by me, JW and RK) the TNX breaks to a record low so that all the paper can flow into the greatest bubble of all time. This is where gold could drop below my shrimpy 1300 (I bought earlier but will buy again there).

    And then we will see a phenomenon ... The East will discover price this way, as the West discovers that way. And the West will no longer dominate in terms of price discovery OR settlement.

    And you will live to see JPM, Citi, BofA, MS and GS (and their remaining European counterparts) literally eat shit and die.

    And then, maybe, the BIS and ECB will say, "Here is our gold, let's reprice and settle like grown ups".

    All that remains is the wildcard of the middle Kingdom and their suitcase nukes. Our crazy Uncle will be rattling sabers there, and only God knows what else.

    -W

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  10. For those of you who follow FOFOA you have probably have read this but for those who don’t this about says it all …
    and the below is coming from a state who is worse off than Greece.

    http://fofoa.blogspot.com/2012/04/open-forum.html?commentPage=3#c6923002774253911405



    Dave, I was one who got conned in Y2K. Only good thing was I got some AU under 300 per OZ. I thought Y2K was going to be the catalyst that started what we now see coming. It obviously was a non-event. They were able to kick the can down the road for another decade plus.

    My question for you is do you see them prolonging this for years. I’m not asking for a “written in blood” answer just an opinion as to days, months, or years? I personally don’t understand how they have done it this long… I have had about the same response as above (link) as to “it cannot happen here to us…. we are Americans”…..well so am I –born and raised but the hand writing is on the wall…. people need to open up their eyes….

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    1. I don't know how long this country can kick the can down the road. I thought we would have collapsed by now. We did in a "de facto" sense in 2008 but they did a great job of creatively rearranging the deck chairs on the Titanic.

      All I can say is that it is happening slowly and then it will happen suddenly, per my post yesterday

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    2. My guess is that they will try as best they can (in the US) to forstall the collapsing bond bubble until the November election, just like they did with MBS in '08.

      I think the real question is, globally, how relevant will the US be by then? So I think the question about "them prolonging this" is more a matter of how relevant "they" are with their attempts to prolong?

      As Jim Willie said in the interview (where he predicted the TNX to fall to 1.5 just a few days ago) there's a "new sheriff in town", but I don't think he stepped off a plane from as far east as China. I think it's an old sheriff with a new posse, the BIS, which has welcomed the Eastern central banks into it's fold.

      Damon Vrabel had said that the East will be the new epicenter of systemic chicanery, and here we have China leasing gold. All thinngs new under the sun, but are they merely "old values repackaged for modern times" ??

      If you read A, FOA or FOFOA, you know where I'm coming from.
      -W

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    3. Hey Anonymous,

      Thank you for that FOFOA link.



      -Sicilian Gold

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  11. What are your thoughts on this situation in Argentina?

    http://www.mineweb.co.za/mineweb/view/mineweb/en/page72068?oid=152331&sn=Detail&pid=102055

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    1. Well that explains the delay AUMN is facing regarding the equipment they are moving from Argentina to Mexico. I think in the long run it is bad news for Argentina's economy, as capital and trade restrictions hurt economic models, not help.

      AUMN is about Valerdena, not Argentina. MUX might have some issues.

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  12. I am sure everyone is getting their Treasury on correct? Fools, I am buying Gold here.

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  13. I just found your blog via Bill Murphy's Le Metropole Cafe. He posted this article. I love your blog and looking forward to more posts. Best! Kirsty

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    1. Thanks for the feedback Kirsty. You have a nice blog yourself!

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