Monetization, Gold and the Renminbi

Monetization, gold and the renminbi have  one thing in common:  they all revolve around the dollar.  We are coming upon a major change in how the world views money and the key players are monetization, gold and the renminbi!

Another week goes by and the media misinformation abounds regarding whether we are turning around from the bottom of the recession. The key question here is whether we are truly in a new bull market for equities, or is this a bear market rally. I will place my money on the latter.  There are signs that point to a not so happy conclusion to the recession, but you have to sort through all the green shoot pieces in order to find them.  Once again it is time to resort to looking at the big picture so as not to be mowed under with all the “everything is under control hoopla“.

JP Morgan Chase has come out with some interesting information regarding the value of TIPS (Treasury Inflation Protected Securities) versus the value of gold.

“Gold will outperform Treasury Inflation Protected Securities as the U.S. economy swings to growth and the cost of living rises, JPMorgan Chase & Co. said. Returns on both investments were about the same until December 2005 when gold began outpacing bonds as inflation expectations increased. Gold returned 249 percent in the past nine years, more than double the 108 percent for the TIPS gauge.

The metal outperformed TIPS every year except two after 2000, data compiled by Bloomberg News show. “Gold gives a bigger bang per buck, reacts more to fear, and is more liquid,” Jan Loeys, JPMorgan’s market strategy head in London, said in an e-mail Aug. 12. “We are long gold because we see good demand, partly because of those inflation fears.”

When central banks and other financial entities that make their profits by creating money and then loaning the instant money out to increase their books, turn towards gold, something big is brewing.  They know what they are trying to keep hidden from the public, namely that there is going to be a major change in the fiat currency system and that it is coming sooner rather than later. Soon is a relative term, so I am not implying next month. I will say that the beginning of this currency event will occur before the end of 2009, but  the  transition to a new world reserve  currency will take some years to accomplish.

China and Russia, the largest and most powerful countries to date, have indicated a desire to switch to either a basket of currencies or a totally new currency to become the world’s reserve currency, replacing the U.S. dollar.  China may be the key to a loss of faith in the dollar.  They want a change in the reserve currency and they want it now!   U.S. Treasury Secretary, Timothy Geithner has responded to the Chinese repeated requests to stop monetizing the U.S. debt by suggesting that quantitative easing will end in October.  What a load of bull!

The US Treasury auctions have now moved into stealth mode in order to avoid the ugly truth that monetization of  the debt is running full bore. The Fed cannot stop its quantitative easing policy without throwing the  country into a depression, so they have come up with a new wrinkle.  The  Fed and the Primary Dealers  put a new plan in place for the last auction of 7-year Treasuries. The Primary Dealers bought the bonds that nobody else bought, and after a few days, the Fed bought back 47% of the purchased bonds by the Primary Dealers!   If the Fed is buying back the bonds that no one else wants, then quantitative easing is morphing into a new program that does not have to be so openly advertised.  This little trick allows Mr. Geithner to speak out of both sides of his mouth to the Chinese and other holders of U.S. debt.

Warning after warning  not to monetize, have not been heeded and the U.S. government continues to print money in as vain attempt to get out of debt by creating more debt.  To date the stimulus money has gone  to the big banks and government,  in an attempt to gain control over  the derivatives  markets which started the whole financial crisis in the first place.  The stimulus plan is a joke that has only benefited the large banks and federal and state governments.  There has been no help offered to we the people, with the debt that has been created in our name.  Soon these actions will create a crisis of confidence in the dollar.  On that day gold will move into its rightful position as real money.

Ron Paul comments on the fiat currency problem, the world reserve currency and the role that gold might play in the world’s reserve currency in this video from Nov. 2008.  Bernanke’s response is stunning in the admission that the world’s central bankers have not even discussed a partial backing of the fiat currency with gold! I believe that to be an out right lie.  They know it is coming and they are orchestrating the event to their advantage.

James Turk of Goldmoney.com wrote  a piece this week that puts the government’s policies into perspective and should once again raise a red flag as  to where the current economic policies are leading us.

I wrote the following 22 years ago this month. As the French say, Plus  change, plus c’est la  chose! Nothing has changed except the data, which I have updated in brackets so that I can make some comparisons in my comments below.

Full faith and credit. Bring these words to mind as you read in the papers about the machinations going on in Washington as the politicians there wrestle with the federal debt.

The government puts self-imposed limits on its capacity to borrow.  The limit must first be passed into law, and this is achieved, as with all national laws, by passing a bill in Congress which is then signed by the President. The limit on the national debt is presently $2.32 trillion [$12.104 trillion], and the outstanding debt is just a few [hundred] billion shy of this level. Therefore, the government must stop borrowing  which means it won’t have the money to pay its bills  or Congress must pass a bill which the President signs so that the limit will be increased, which will enable the government to borrow more money so that the house of cards can get even bigger.

The federal debt limit was increased to this level on October 21, 1986 [February 17, 2009]. At that time, Congress raised it from $2.111 trillion [$11.315 trillion], an increase of $189 billion [$789 billion].  Thus, in a little over nine [not quite six] months, the federal debt has increased by about $180 billion [$870 billion], which is about $20 billion [$145 billion] a month or $240 billion [$1.740 trillion] a year.

The federal debt presently is $11.66 trillion, just a few hundred billion shy of the statutory limit.  Given the present rate of federal spending, in two months the limit will be reached again.  In fact, The Wall Street Journal today reports: U.S. Treasury Secretary Timothy Geithner asked Congress to increase the $12.1 trillion debt limit on Friday, saying it is “critically important” that they act in the next two months.

I guess this next one falls under the green shoots category!

U.S. Underwater Mortgages May Reach 30%, Zillow Says

By Dan Levy

Aug. 11 (Bloomberg)  Almost one-quarter of U.S. mortgage holders owed more than their homes were worth in the second quarter and that figure may rise to as much as 30 percent by mid-2010 as job losses and foreclosures climb, Zillow.com said.

Homeowners are being hurt by price declines. The estimated median value for single-family houses slid to $186,500 in the period, a 12 percent drop from a year earlier and the 10th consecutive quarterly decrease, the Seattle-based real estate data service said in a report today.

The negative-equity rate will rise and spin off more foreclosures, Stan Humphries, Zillow’s chief economist, said in an interview. I see a substantial downside risk to prices and don’t think we’ll see a bottom until the middle of next year.

The U.S. housing market is being hindered even as the pace of job cuts and price declines slows. Payrolls fell by 247,000 in July, after a 443,000 loss in June, the Labor Department said. Home prices in 20 major cities declined 17 percent in May from a year earlier, the smallest drop in nine months, according to the S&P/Case-Shiller index.

Home values dipped in the second quarter from a year earlier in almost 90 percent of the 161 U.S. metropolitan areas surveyed by Zillow, the company said. Twenty-three percent of mortgage holders were underwater at the end of June, Zillow said.

Let’s return to the dollar and see how our recent “friendly” treatment of Israel is being repaid in kind.

Bank of Israel halts daily dollar-purchase program

By SHARON WROBEL
Aug 11, 2009 10:10

The Bank of Israel on Tuesday will stop its program of buying $100 million on a daily basis but reserve the right to intervene in the foreign-currency market, the bank announced Monday.

“As already announced [last Monday], the Bank of Israel will act in the foreign-exchange market in the event of unusual movements in the exchange rate that are inconsistent with underlying economic conditions, or when conditions in the foreign-exchange market are disorderly,” the central bank said in a statement. “The new operating policy of the Bank of Israel in the foreign-exchange market will provide a better response to the economy’s needs.”

The central bank said it would discontinue its program of daily purchases, which began in July 2008, because the targeted level of foreign-currency reserves had been achieved. Foreign-currency reserves stood at $52 billion at the end of July; the target set by the central bank in November was between $40b. to $44b.

Following the announcement, the dollar dropped 1 percent to NIS 3.87.

The Bank of Israel said it could now buy or sell foreign currency in response to exchange-rate movements.

“The governor of the Bank of Israel’s announcement is maybe the most expected surprise seen in the capital market in a long time,” Tal Avda, deputy head of investments at Clal Forex, said Monday. “History has shown that the only significant factor influencing the shekel-dollar exchange rate in the long term is the value of the greenback in the global-currency market, and [Bank of Israel] Governor Stanley Fischer knows that.”

Last week, Fischer said the central bank could not beat the market in the long term and would not continue to buy foreign currency indefinitely.

For some reason these stories don’t add up to water for the green shoots to me, but what do I know.   Sometimes I think it would be easier just to take the soma and drift off on the soft cushions  the managed media is spreading out for us.   Just kidding!   The key to survival is to recognize the trends as they start out and go with the trends.  Through out all the smoke and mirrors that are prevalent today, the trend for gold investing is quite clear. Gold will be going up and it will be doing it quite soon.  Gold investment opportunities abound in this environment and it is up to us to take advantage of them whether it be investing in gold coins, gold stock investing, investing in gold certificates, or investing in gold for your IRA.

The Fed Announcement

I want to give you a quick summary of the Fed’s announcement this week and a look at what I consider the key passage of that announcement.

1. There will be no change in the Fed funds rate.

2. US economic activity is leveling out while conditions in the financial and housing markets continue to show signs of stabilization.

3. The Fed views inflation as subdued for some time to come.

4. The Fed will continue its objective of  price stability.

5. The Fed is in the process of buying $300 billion of long-term Treasuries (read: continuing its policy of quantitative easing, aka, monetization) , but the Fed plans to have it all bought by the end of  October and then stop.  As I pointed out earlier, this is a direct result of the Chinese flexing their muscle.  They are in the driver’s seat now, not the Fed.

This is directly from the Fed’s minutes. I have added the bold to high lite some points.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time. In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets, and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage- backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchase by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

It is clear that the Fed is attempting to monetize it’s way out of this financial crisis. It will not succeed.  Look for a major break in the confidence in the dollar no later than the end of October 2009.  The key resistance points for the dollar are .77 on the down side and .79 on the upside.  Once .77 is breached the dollar is on its way to .72 and after a major battle there, to .67 and below.

Gold will benefit from the dethroning of the dollar, make no mistake about it.  Use any dips in the price of gold to acquire more of both physical gold, gold coins and bullion, and gold stocks. Now is the time to be investing in gold because the Chinese are, and the renminbi  may be the world’s next reserve currency, or at least a major part of the basket.  Remember that monetization, gold and the renminbi are all tied to the dollar and watch for the break in the dollar coming to a theater near you shortly.

Till next time, good luck and good trading!

More Gold Market Analysis:

• Wow! 152 Words
• Gold Surged On Bernanke’s Testimony!
• Government Prints Money and Investors Turn to Gold!
• “Dead Man Walking”
• Jim Sinclair Picks $1,224 Gold

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