State shall enter into any Treaty, Alliance, or Confederation; grant Letters
of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but
gold and silver Coin a Tender in Payment of Debts; pass any Bill of
Attainder, ex post facto Law, or Law impairing the Obligation of Contracts,
or grant any Title of Nobility." ~ United States
Constitution, Excerpt from Article 1, Section 10 ~
A quick glance at most of the
headlines over the weekend and the primary focus seemed to be either calling
a near term top in domestic equity indices or a focus on the Greek debt situation.
Why is anyone even paying attention to what is going on over there? Until the
ISDA declares a default where the underlying Credit Default Swaps (CDS) are
triggered, it is all just noise.
The ECB has broken the rule of law by
placing itself as the senior creditor ahead of private creditors, the Greek
government is trying to pass retroactive legislation to trap private sector
creditors holding out of the PSI, and the leader of Greece was not even
elected by the people of Greece - how much more manipulation and insanity do
we need to monitor?
Similar to the price action since
2008, central banks around the world control everything from financial
markets to the ascent of political leaders. These same political leaders help
central bankers and planners control policy and decision making at the
highest government levels in Europe and around the world. It would seem that
the United States should change the motto from "We the People" to
"We the Bankers."
However, there is one particular
asset class that even the central bankers have a hard time controlling. While
they can impact short term price action through direct currency manipulation
initiatives, in the longer-term gold is likely to move in only one direction
The price action on Tuesday reminded market
participants that actions such as the Greek bailout come at a cost.
Quantitative easing and/or printing money (depending on what one wishes to
call the practice of producing fiat currency out of thin air) has a direct impact on the price of gold.
Many financial pundits argue that
gold has no utility, but what they fail to recognize is that gold is the
senior currency to all other fiat currencies. Silver is also a form of
currency and is senior to all other fiat currencies as well. While one can
draw the utility of gold into question, the idea that gold is the senior most
currency to all other fiat currencies is not new.
The Constitution of the United States
of America, which is over 200 years old, refers to gold and silver as forms
of payment. Looking back thousands of years the Romans used gold coins as a
form of currency. The idea that gold and silver are currencies is certainly
not a grandiose thought or a stretch of historical concept. Trying to depict
gold as a worthless asset depends on your view and consideration of fiat
There are those that would argue that
the Federal Reserve of the United States is not actively manipulating
economic conditions domestically or abroad. For those that view gold as a
poor investment or hedge against currency devaluation need to consider the
charts illustrated below. The chart below was produced by Thomas Gresham of
Total Asset Growth of the Federal Reserve System - 1915 - 2012
It is rather obvious by looking at
this chart that the Federal Reserve has actively sought to enter domestic and
foreign financial markets. The surge in balance sheet assets serves to prove
how far the Federal Reserve Bank is willing to go to maintain markets which
seemingly are only allowed to move higher over time.
This chart is bearish for nearly any
form of paper backed assets. The above referenced chart is long-term bearish
for the Dollar and Treasuries and long-term bullish for physical gold and
silver. As the Federal Reserve continues to debase the U.S. Dollar in concert
with other central banks' monetary easing programs, gold and silver prices
over time are destined to move higher in virtually every form of fiat
During the same time frame that the
Federal Reserve has seen its balance sheet grow exponentially, the rapid rise
of M2 money supply is staggering. The long term chart of M2 is compared to
gold futures in the charts presented below.
M2 Money Stock
Gold Futures Monthly Chart
It is rather obvious what has
happened to the price of gold as the M2 money supply has grown. The idea that
the Federal Reserve has not already destroyed a significant amount of the purchasing
power of the Dollar can easily be refuted by the two charts shown above.
In the short-term, gold and silver
could suffer from a pullback, but in the intermediate to longer term it is
unlikely that we have seen the highs of this bull market for either metal. As
long as central banks around the world continue to print money and expand
their balance sheets gold and silver will remain in a long-term bull market.
The daily chart of gold futures is presented below.
Gold Futures Daily Chart
As can be seen above, it is not out
of the question that we could see gold pullback to test one of the key moving
averages in coming days/weeks. However, I expect the key support area to hold
in the event of a sharp selloff. Ultimately, I expect to see a breakout over
the resistance zone in the days/weeks ahead. However, I would not be
surprised to see gold consolidate or work marginally lower from current
prices before breaking out to the upside. Right now the primary threat in
this fledgling gold rally is a short-term spike higher in the U.S. Dollar.
The primary catalyst which could drive a flight to the Dollar involves the
sovereign debt situation in Greece and the Eurozone as a whole.
While the short-term price action may
be bearish, the intermediate to longer term time frames are quite bullish for
metals as central banks will continue to race to debase their currencies.
Quantitative easing in the U.S. and around the world will become pervasive
and gold prices could potentially soar in value. The data from the Federal
Reserve Bank itself suggests that they are indeed increasing the money
supply. As time has passed, the money supply and gold have seemingly grown in
lockstep with one another. Surely inquiring minds do not consider this mutual
relationship between gold and the money supply to be purely coincidental.
As further evidence that the Federal
Reserve continues to use quantitative easing to manipulate asset prices
through direct entry into financial markets, a chart of the velocity of M2
clearly depicts that the velocity of money is declining. I am not an expert
regarding macroeconomic data, but if the velocity of money is declining to
1960's levels would it be a stretch to say that we may be going through a
period of stagflation? The chart below illustrates the Velocity of M2 Money
Stock courtesy of the St. Louis Federal Reserve Bank.
Velocity of M2 Money Stock
For those unfamiliar with the term
velocity of money, it is simply the rate of turnover in the overall money
supply. The velocity of M2 is expressed as the number of times that a Dollar
is used to purchase final goods or services which are included in the total
gross domestic product.
The short term technical picture in
gold is a bit suspect due to overhead resistance and recent U.S. Dollar
strength. However, the longer term macro factors that impact the value of the
U.S. Dollar and precious metals are all telling us the same thing.
As time wears on and central banks do
even more to prop up the broader economy and failing financial institutions,
it is without question in my mind that gold and silver will both benefit
handsomely from these decisions being made by central bankers from around the
Ultimately, I am very bullish of gold
and silver in the intermediate to longer-term, but in the immediate
short-term frame gold could consolidate or pullback before breaking out to
Gold and Oil Guy