Gold and the Dollar

December 2, 2008 Inflation, Physical Gold, Politics No Comments

The markets are trying to regroup after yesterday’s big sell off. Good luck. 679 points peeled off the DOW marking the largest drop in the last eight months. Dec 1 moved into the top 10 for the largest drops in the DOW ever. Apparently officially calling the US in a recession 11 months after it started was a big shock to the Dow. Who are these “experts” and why does anyone listen to their opinions. Anyone with half a brain knew that we were and are in a recession. These guys must come from the same school as the Fed which teaches that you can print unlimited amounts of dollars without affecting the currency’s value. Hey, why not raise the minimum wage to $100,000.00 per year, that way we can eliminate poverty. Geez, I haven’t even really started and already I have a headache!

Ok, enough of that. The DOW is up 18 at 8,167, the NAS is up 11 at 1,409 and gold is up 12 at $780. Maybe this can hold until the end of the day, but I doubt it. It would be nice to see the markets tread water for a while but somehow I don’t think that is going to happen.

Where Is The Dollar Headed?

The dollar has entered a trading range between 88-85. The dollar appears to be consolidating in this range, but if we have learned one thing recently, it is to expect the unexpected. Volatility is the rule for the time, so expect the dollar to snap out of this range soon and move down to the 80 support level before pausing and heading to the basement. The negative MACD of the dollar chart indicates that the move should be to the downside. The dollar is way above its 200 day moving average which currently is slightly above 76. This gap must narrow and I see it correcting with a drop in the dollar, down towards the long term support at 80. The fundamentals for the dollar are not getting any better, in fact they are deteriorating rapidly.

The American economy, for that matter, the global economy is slowing rapidly with nothing but worse news coming out every week. On top of that we have the Fed ready to drop money out of helicopters in order to jump start the US economy. “Big” Ben Bernanke recently stated that, not only will the Fed be prepared to cut rates again, he also has another trick up his sleeve.

“The second arrow in the Federal Reserve’s quiver – the provision of liquidity – remains effective. The Fed could purchase longer-term Treasury or agency securities on the open market in substantial quantities. This approach might influence the yields on these securities, thus helping to spur aggregate demand.”

This is a policy called “quantitative easing”. It means the Bernanke led Fed aims to dramatically increase the money supply. This policy is how “Helicopter Ben” got his name. He has written about this many times. This is what he said he would do in order to prevent a depression. There are two real scary things wrapped up in Ben’s statement. He is inadvertently, or possibly subconsciously telling us that the Federal Reserve (which is neither) thinks that we are headed into a depression. The second scary part of that statement implies that inflation, if not hyperinflation, is just around the bend. Get ready, it’s coming. On the bright side, if there is a bright side to hyperinflation, this is extremely gold positive.

Here we see the same policies that failed to stop the Great Depression being implemented again. History does repeat itself. By the time this fiasco has run it’s course the US will be unrecognizable to most of us. It is sad that we are being “lead” down this path by our “political leaders”, when there is such a simple solution to the problem. Government should let the failures happen. Companies and people that made bad decisions should fail. That is how the system cleanses itself. Other companies buy up the failed companies at bargain rates and change management so they can be run at a profit. Nothing is to big to fail! The government should lead the way by slashing spending to the bone, lowering taxes and encourage the private sector by slashing the capital gains tax. These moves would kick start the economy over night.

There is one thing that we should never forget. GOVERNMENT IS THE PROBLEM, NOT THE SOLUTION!

Platinum

Now let’s turn to look a platinum. Platinum is a curious beast. It is mostly valued for it’s industrial uses mainly catalytic converters on autos. With the auto industry stalling the price has plummeted. Platinum usually has a much wider spread between it and gold than it currently has. The time is approaching when the buy signal should start flashing, if it isn’t already. I like to have some physical platinum and platinum stocks. With platinum at $795.00 there is not a huge amount of downside risk. When the rising tide turns for gold it should lift all the precious metal boats.

One final note on gold. Citigroup has posted a very gold positive report. The time is nearing for the next move in gold.

Citigroup says gold could rise above $2,000 next year as world unravels. Gold is poised for a dramatic surge and could blast through $2,000 an ounce by the end of next year as central banks flood the world’s monetary system with liquidity, according to an internal client note from the US bank Citigroup. Citigroup said the blast-off was likely to occur within two years, and possibly as soon as 2009. Gold has tripled in value over the last seven years, vastly outperforming Wall Street.

Till next time, good luck and good trading!