Gold and the Currency Crisis

Good morning to all.  Let’s take a snapshot of this morning’s action in the markets.  The DOW is down 82 at 8,547, the NAS is down 32 at 1,508 while gold is up $7.41 at $839.00.  Not a bad little jump up to start the week.  Gold is performing pretty well, considering all of the deflation talk that is going around.  It is also very nice to see gold move up as the Dow heads down.

If gold breaks that pattern of moving with the DOW  we could be seeing the beginning of a serious up leg for gold.  Once gold establishes itself as the currency of last resort, what the dollar does, or the DOW for that matter, will no longer be mirrored in its price  At that time gold will be free to reflect its true value in relation to the differing financial conditions in the world.

Now that we have gold and the dollar side by side, let’s take a look at how each will perform during a monetary crisis.

Governments around the globe are in involved in a concerted action to bring back liquidity to the markets.  The hope is that the markets will stabilize and everyone can return to living above their means. (Pun intended) It may happen for a while, but there is a new financial crisis in the wings.  All these dollars and other fiat currencies will launch an inflationary crisis, the likes of which few can imagine.  Stimulus programs, whether they be here in the US, China or anywhere else in the world, are funded by debt and and printing press money.  When all is said and done these bailouts and stimulus packages have to be paid for by someone. In the case of the US that someone is the US Taxpayer.

All this monetary stimulation via direct injections into the money system and “quantitative easing” [directly debasing the system by injecting newly printed dollars into the system] that we are now seeing across the globe has the stated purpose of reflating the system in order to stop deflation.  Deflation is not what is happening here!  This is a monetary crisis brought on by the implosion of the derivatives markets.  Like a Ponzi scheme, everything was swell until money started to move out.  All of a sudden derivatives had to be valued in reality as opposed to the artificial values that were placed on them in the past.

Derivatives Crawl Out Of Their Hole Into The Light

Derivatives by there very nature “derive” their value based on actions of other markets.  The housing bubble bursts and funds, insurance companies and companies that had nothing to do with housing are suddenly on the hook for massive losses.  People lose confidence in investing and pull their money out of stocks.  The markets plunge and further losses appear on corporate books. Do you see where this is going?

Foreign governments are starting to pull out of US Treasuries.  Can you blame them?  I think not.  Why would anyone hold paper that loses value when they can invest in tangibles that are gaining in value?  If this trend continues and there is no logical reason why it shouldn’t, the dollar is going to see a lot more down days.  As the dollar drops, gold will continue to strengthen.  As more and more dollars compete for goods, prices will rise.  As prices rise, people will lose confidence in the dollar and seek the safety of gold as a store of value.  I believe that this next phase, leading toward hyper-inflation, is beginning now.

The sad part of this whole story is that it need not turn out this way.  Admittedly, the odds of the scenario not unfolding as described, are slim and none.  History tells us that when faced with making tough decisions and losing power, governments always try to inflate their way out of debt.  Kick the can down the road and keep wielding the power.

The answer to this situation is so simple that even some of the European Socialist countries are trying it.  You kick start economies by drastically reducing taxes across the board and reduce the size of government.  Put the money back in the hands of the “wealth producers” and take it away from the the non producers, aka “regulators” in government.  It works every time it is tried. Not only does it work, but cutting taxes increases revenue to the government as the economy grows.  Go figure!  Some how I do not see the next administration trying this proven approach.

Gold Is Ready For The Coming Financial Events

The charts on a lot of the quality gold stocks are starting to look promising.  I say this with a  certain amount of trepidation because every time I feel we that we are about to turn the corner, gold gets smacked down again by institutional sellers.  It looks like this too may be about to change.

There are rumors swirling around regarding the number of contracts that are being taken out of the Comex warehouse. When people actually take delivery of gold from the the Comex it lessens their ability to hammer down the price of gold. I think it is a little too early to assume that this fact until I can get some hard numbers and see if a pattern is developing rather than  isolated incidents.  If more and more people are actually taking delivery of the physical gold from the Comex warehouse, this will be very, very positive for gold.

Let’s take a look at some gold stock charts starting with one of my favorites, GoldCorp.

Volume appears to be picking up and the stock has made nice gains since hitting it’s low down at $15.  This stock should explode when gold starts to really move.

ABX, the “consolidator” of the gold industry has a chart very similar to GG.  It has had some gap ups, but on the whole it is steadily rising and filling in the gaps it had on the way down.  This is another stock that is positioned for a moon shot once the party begins.

Now let’s look at RGLD.  Royal Gold has been a favorite of mine for a long time.  This stock is amazing.  It has recovered nearly everything it lost since July.

Royalty companies have all the upside power of a gold play without having to physically deal with the day to day issues of running a mine.  All they need to do is pick the right companies to back.  No small task in itself, but it appears that RGLD has succeeded on that front.  New highs are in store for RGLD when gold gets launched.

As always, these are stocks that I like, nothing more.  I am not recommending that YOU buy anything, i am merely informing you of what I buy and why.  Before you buy any stocks do your own homework and understand the company before you purchase it.  What may make sense to me may not fit into your investment portfolio.

Till next time, good luck and good trading!

More Gold Market Analysis:

• Fiat Currency Cycle
• Deepening Financial Crisis
• Gold as Currency
• Putin On Capitalism and the Financial Crisis
• Gold Vs. Deflation and Inflation

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