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It
behooves us to refrain from getting carried away by reports of the imminent
demise of the US dollar. Eventually it will become worthless, but
for now, and as long as it is measured against other fiat currencies, the
decline will be gradual, not as a watershed.
This
is due to the fact that the 6 currencies that make up the US dollar index are
not much stronger than the greenback, (with the possible exception of the
Swiss Franc). The Euro makes up 57.6% of the index and many large Euro-banks
are in worse shape than the big US banks. The Yen makes up 13.6%, and the
Japanese banks have problems of their own. The British pound makes up 12% and
Great Britain is on the ropes. The Canadian dollar makes up 9% and the
Canadian government cannot permit the Canadian dollar to rise above par, for
fear of a collapse in exports. The Swedish Krona makes up 4% and the Swiss
Franc 3.6%.
The
main impact of a collapse in the US dollar will be felt, not in the dollar
index (where everybody is watching), but in its relationship to the price of
gold.
The
reason is this historical fact: for over 5,000 years gold has been the
ultimate ‘go to’ money. It is the template against which fiat
money is measured.
Charts courtesy
Stockcharts.com
Featured
is the index that measures gold against the US dollar. The green boxes
surround the consolidation that took place before price broke out at the
resistance line at the top of the box. The blue numbers represent the
size of the advance from the break-out of one box to the top of the next box
as it relates to the index at the right. You will notice that there is
a dramatic progression ranging from 0.6 to 5.0.
Due
to the fact that the US government has opted to go for an exponential uptrend
in the federal deficits, this index is also going exponential. We can
reasonably expect that the next number (currently 1.75 at the
‘?’) will be greater than 5.0; much greater!
The
blue arrow inside the oval points to the observation that the two moving
averages are in positive alignment with each other. This is the sign of
a strong bull market.
Keep
in mind that most breakouts are tested.
Such a test in now underway. Use pullbacks such as the one you are seeing
now, to add to your portfolio. The final top is still years into the future!
The
reason we can state this with confidence is because the amount of
‘printing press money’ the Obama administration is throwing at
the US economy guarantees massive price inflation and concurrent demand for
gold.
Pretend
you are in an auction hall. Just before the auction begins, a wealthy
individual enters and begins to hand out handfuls of hundred dollar bills to
the bidders. What do you think will happen to the prices realized at
that auction?
This
is the piece in the puzzle that the gold bears miss. They overemphasize the
importance of technical analysis and neglect the fundamentals. They warn
about deflation when there is no deflation.
Deflation
is when the central banks withdraw money from the system. The opposite is
occurring! Isolated asset deflation is not monetary deflation!
Featured
is the daily gold chart. The ‘gold bears’ are likely to point to
the drop in price last October (red arrow) as a harbinger of what will happen
to the price of gold if and when the stock market corrects as it did back
then. Sure enough gold was dumped as people needed cash to cover their
commitments. Now notice how quickly gold recovered. For this reason
people are not likely to dump their gold and gold stocks if and when a repeat
of 2008 should occur. The next panic could very well see people rushing to
gold for safety! You may recall that last summer we pointed out to you
the importance of the so-called ‘Golden Cross’ (black arrow).
This describes the 50DMA rising above the 200DMA for a positive alignment and
it is the sign of a roaring bull market. Each of the blue arrows points to
the date when we published an article (archived at this website), while we
pointed out that this was a good time to add gold to a portfolio. The
green arrow points to another buying opportunity in the making. Keep in
mind that we are in the middle of the annual Christmas rally, and therefore
price could even turn up without reaching that $1,100.00 target. (Our sell
signals are reserved for subscribers and on December 3rd we issued a sell
signal to our Premium Service subscribers, while we had advised taking
partial profits for the previous two weeks for the benefit of all our
subscribers).
 
Featured
is the Monetary Base chart, courtesy Federal Reserve Bank of St. Louis.
Since
late 2008 the Monetary Base has almost tripled. That kind of an increase has
never happened before. You can ‘bet your bippy’ this is going to
cause price inflation. The deflationists out there will be proved wrong once
again. The history of the US FED is such that at the first sign of perceived
deflation, they try to ‘solve it’ by opening the money spigots. The
evidence is right here in this chart!
Moody’s
reported this morning that the US Treasury is likely to lose its AAA rating
due to this unbelievable deficit spending.
Fundamentals
for gold have never been better!
This
chart courtesy FDIC shows the ratio between funds on hand and commitments to
secure bank deposits at FDIC insured banks. Notice the rate has just
gone negative. The FDIC is essentially broke!
This
means the FDIC needs to raise money before it can meet its next commitment.
Thus far in 2009 some 131 banks have gone bankrupt. Each time a bank
‘goes under’ the FDIC has to add funds to the remaining assets of
the failed bank in order to make the bank attractive for another bank to buy
it. The FDIC raises money by charging the remaining banks a fee and by
accepting bailout money from the Federal Reserve. Call this another
‘leak in the boat.’ It’s a ‘lose-lose’
situation. By forcing remaining banks to come up with more money, these banks
then become candidates for failure. The FDIC is left with only one option:
borrowing from the US Treasury. This results in more money printing
which is ‘gold-friendly.’
We
often advise readers to keep track of the predictions made by the analysts
they follow. If we may we’d like to remind you that for years we have
warned that Global Warming was a scam, designed to steer funds into the bank
accounts of those who are addicted to Global Warming and who use the money to
do more ‘research’. ‘Climategate’ is proving
that those of us who questioned the wisdom of wasting billions on ‘cap
and trade’ laws were right all along. Misdirected public funds
result in money wasted that should have been used to help small business (via
tax incentives) to solve the unemployment crisis. Al Gore admitted in a
recent speech in Great Britain that underlying the Global Warming movement is
the push for global control. There are rumors that Al Gore has cancelled a
major speech that he had planned to deliver at the Copenhagen conference.
Ironically this conference is not ‘green-friendly’. The large
number of private planes and limousines that have converged on Denmark are
leaving an ugly carbon footprint. Not many of these delegates came by
bicycle.
Some
of the ‘gold bears’ point to the fact that sometimes gold rises
faster than gold stocks. This is probably due to the fact that bullion banks
are covering short positions in the metal. It is also due to the fact
that central banks are buying gold bullion. They do not buy gold
stocks.
This
chart courtesy J.P. Morgan. The research department at J.P. Morgan analyzed
the private sector experience of all of the cabinet appointments made by the
US presidents since 1900. The results show the lack of experience of the
people appointed by the Obama administration, compared to those of his predecessors.
Yet these are the people who are trying to ‘fix’ the economy!
Summary:
Some
analysts who are calling for a major top in gold, base their prediction on
the expectation that the US dollar is bottoming out.
The
dollar is indeed due for a bounce but this does not necessarily imply that
gold must drop (except for a normal pullback in an ongoing bull market). Gold
and the dollar could easily rise up together, each on its own supply and
demand factors.
For
several months in 1973 and again in 2005, gold stocks rose along with the
rising US dollar.
For
the sake of emphasis we repeat the theme of this essay. A few bearish
analysts are concerned about a possible deflationary collapse. They are
missing an important piece of the puzzle. Deflation (except for isolated
asset deflation) is a monetary phenomenon. It is caused by the FED
withdrawing money from the system. Does anyone expect that to occur
anytime soon?
It’s
time for the gold bears to go and hibernate somewhere!
Most
bull markets feature the ‘up two - down one’ characteristic. By
being prepared to accept the ‘down one’ part of the overall rise,
and use it to add to our ‘gold and silver stash’ we can take
advantage of these opportunities (as now). This ‘down one’
acceptance also means that those who use margin should avoid the temptation
of being ‘over-margined’.
A
popular feature at our website is ‘My expectations for the
Future’. It is frequently updated and you might consider reading it on
a monthly basis.
For
the past 17 weeks we have posted our ‘Pick of the Week’, and this
is also a free feature at our website that is drawing a lot of attention,
along with an article titled: “Long-term charts.”
Happy trading!
Peter Degraaf
Pdegaaf.com
Also
by Peter Degraaf
Peter Degraaf is
an on-line stock trader with over 50 years of investing experience. He
sends out a weekly Email to his subscribers. For a 60 day free trial,
contact him at itiswell@cogeco.net, or
visit his website www.pdegraaf.com.
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