Sunday, December 7, 2008

The Dollar is doomed; gold and silver will rise

The US dollar is doomed. There is no doubt. The massive addition to money supply and exploding deficits assure that the fiat dollar will be officially devalued through hyperinflation, replacement with the Amero or a new, "improved" dollar, or some similar device. Devaluation is baked into the economic cake. Massive increases in money supply dilute the value and purchasing power of the currency.

Yet, the price of gold in the futures markets seems to undermine this view. Since cracking $1,000 last March, gold's spot price is close to $750. Moreover, the dollar has bounced off an 8-year low to its highest levels in two years. Isn't the market projecting future values into the most accurate price today? Maybe this isn't a good time to buy?

Because of this anamoly, some people who plan to purchase precious metals to protect the value of their savings have postponed their purchase, hoping to time it with a bottom of the metals and a high in the dollar. Given my plea to purchase gold at what I thought was a low last August, this waiting strategy has paid off -- maybe.

Their strategy has been brilliant if they can just pick up the phone Monday and buy sufficient gold to satisfy their needs with no delay, at near the market price. The problem is that worldwide demand for gold has been huge, and supply is scarce. Yet the spot price of gold is still relatively low. Shouldn't a lower price reflect lower demand? Conversely, shouldn't high demand mean higher prices? And regardless of the price, shouldn't one be able to buy whatever amount of gold they want at or near the market price? In theory, the answer is "yes." But the situation today is that physical gold (as opposed to "paper" gold reflected in spot prices), is difficult to get and has at least a 15% premium over spot.

My best take on the situation is that the dollar boomlet will be very short-lived. It has much to do temporary demand for dollars to unwind derivative contracts, as well as the illusion of safety (the US treasury bond market may be failing). Moreover, the Powerz manipulate the price of gold to conceal inflation and to try to keep the public's faith in fiat currencies. Meanwhile, those in the know, those who understand the fundamentals, are buying in record amounts.

The bottom line: if you're planning on investing some of your savings in gold and silver, then you had better to it this month. The sooner, the better. An attempt to time the market is bound to fail, because no one knows in advance what the low price is. And if you're trading what should be an insurance policy to maximize fiat profits, you're playing with fire.

And while you're establishing insurance positions for the coming economic turmoil, don't forget basics like food storage, non-hybrid seeds, water filters and such. Precious metals will help to preserve the value of your savings. But you'll still need the essentials to stay alive.

Below are links to articles to substantiate what I've said above.

Inflation is baked into the cake:
The Neo-Alchemy of the Federal Reserve - Congressman Ron Paul

Bernanke's Playbook - Dr. Gary North. "We are now reaching the point of the helicopter drop. If the FED does not reverse its policy of buying bad debt with new money – high-powered money, as Friedman called it – we will get mass inflation before the next Presidential election."

The US Monetizing Debt by Printing Money

Bankrupt G7 Print Money to Reflate Economies

41 States are Facing Severe Budget Shortfalls for 2009. As will cities, counties, etc.

Half-million jobs vanishes as economy deterioriates.

Why Credit Cards Matter So Much.

Bank has little option but to ready the printing presses.

"50 Ways to Beat Deflation" -- new lyrics to the Paul Simon hit song.

The Gold Price will soon take off:
Comex Gold Shocks and Awe -- observations on the subtantial deliveries being taken on gold futures contracts at the Comex. Generally options buyers just take paper profits and/or losses. Rarely do options holders take delivery. Jim Sinclair and others have been calling on patriots to take delivery for some time now, putting an end to the scam of using futures contracts to inhibit the price of gold. We've seen the disconnect between the price of "paper" and physical gold for six months. Evidence is mounting of substantial deliveries in December and February, pulling the rug out frm under the theives. For more insights into these phenomena, see "What's Really Going on with Gold and Silver."

For more on this stunning event, you must read Antal Fekete's article on the new "backwardization" of gold pricing in the futures markets. Hal Turner summarizes the most salient points here. "December 2 is a landmark, because before that date the monetary system could have been saved by opening the U.S. Mint to gold. Now, given the fact of gold backwardation, it is too late. The last chance to avoid disaster has been missed. The proverbial last straw has broken the back of the camel. Few people realize that the shutting down of the gold trade, which is what is happening, means the shutting down of world trade. This is a financial earthquake measuring ten on the Greenspan scale, with epicenter at the Comex in New York, where the Twin Towers of the World Trade Center once stood. It is no exaggeration to say that this event will trigger a tsunami wiping out the prosperity of the world." As this realization hits the markets, the price of physical gold should skyrocket. (Check here for more observations on backwardization.)

6 comments:

Triple Hash said...

Porter,

I don't discount what you say about inflation, but read Robert Prechter's book, Conquer the Crash. He talks about deflation (the contraction of money and credit) which will usher in the next Great Depression. Read it and post your thoughts on your blog. I'm curious what you and others that have always worried about inflation think about his ideas.

BTW, he acknowledges the Austrians probably understand the Great Depression and other economic issues better than the rest. But, he differs on what we're about to go through.

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Ryan Underwood said...

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3526645/Citigroup-says-gold-could-rise-above-2000-next-year-as-world-unravels.html

Ryan Underwood said...

In the above link, a Citigroup analyst recommends gold as a buy.

Triple Hash, if you don't think endless bailouts, a massive new government jobs program, and the end of the Bretton Woods system signal inflation, I've got a bridge to sell you. Yes, destruction of fractional reserve credit and liquidation of bad debts is a deflationary environment. But that is the short trend. The long trend is inflationary, as it has been ever since the inception of central banking.

T Town Tommy said...

If I had to choose right now what to invest in between precious metals and real estate, right now I would go with real estate.

There are some incredible buys on the market for pennies on the dollar with all the foreclosures in the US.

Just my 2 cents worth!

~T

Porter Davis said...

I think Ryan sufficiently deals with Triple Hash's comment about Prechter.

As far as buying real estate, my recommendations have to do with priorities. If you have $1,000, put it into food storage, seeds, water filter, etc. Once the basics are covered, find a store of liquied wealth that is tradeable for things you will want later. After that, by all means look for longer term, less liquid investments.

Triple Hash said...

Listen to this (The Answer to the Economic Crisis) from the Lew Rockwell show. And you'll hear what I'm talking about.

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