In Their Own Words
By Rich Checkan
In last Thursday’s Information Line, I shared with you some thoughts on the simultaneous strength of the U.S. dollar and gold. I mentioned we were blessed to have some amazing, well-respected friends in the industry, and when asked, they were happy to share some of their thoughts with us.
So, I did.
But, they actually shared much more than I was able to include in Thursday’s newsletter. And, their Pearls of Wisdom were too valuable to leave languishing on the cutting room floor…especially since we value their opinions. These are folks to whom we always pay attention. What they say is worth hearing.
At the end of this article, we provide links to all our respected contributors’ newsletters in case you like what you read and would like to subscribe to their services.
In addition, I’ve included a recent interview I did with Marc Lichtenfeld on Oxford Club Radio. Please enjoy Marc’s entire broadcast (30 minutes). I join Marc to discuss what’s going on in the precious metals market from the 9:20 mark to the 18:20 mark (9 minutes).
In their own words…
I believe the rout in gold following the failure of the Swiss referendum will prove to be a long-term bottom in the gold price. Investors around the world are currently seeking liquidity -- and so they are mostly buying dollars. But, as the European debt crisis deepens and as problems with Asia's banks materialize this year, investors will soon prefer solvency to liquidity. These banking problems, the collapse of high yield bonds, negative real interest rates in Treasury bonds, and vastly overvalued equity markets should all combine to produce much higher gold prices in 2015.
“If anybody has even a single doubt about the fallacy of central banking, the Swiss National Bank’s move to unceremoniously remove the Euro-peg should have put them to rest.”
“Gold is no longer optional and most investors could easily double their allocation and still not have enough.”
“Any credibility the Swiss National Bank had left after three years of supporting this policy has just been cashed in. They could have made a phased exit or announced a change in direction at one of their regularly scheduled meetings. Apparently none of the world’s other central bankers were consulted ahead of time which I find very troubling considering what an effort they’ve made to work “together” for years now.”
“The U.S. Dollar remains the best looking horse in the glue factory for at least a while longer.”
The stronger dollar is a positive for inflation, interest rates, overseas travel and the cost of imports. But there are negatives as well, including a tougher market for domestic exports and diminished returns for U.S. investors holding foreign assets. In this cloudy environment, the wise investor will hedge bets.
Pamela and Mary Anne Aden
As we embark on this new year, deflationary forces are intensifying around the world. Inflation is very low.
With the exception of the U.S., global economic growth is seriously lackluster. This has made the U.S. the world’s safe haven, which is why the U.S. dollar is the strongest currency and U.S. government bonds were the investment winners in 2014.
This will likely continue as we move into 2015, and gold is now benefitting as a safe haven too. It’s currently turning bullish and it’s set to rise further.
On the other hand, oil and the commodities have been hard hit. And with global growth slow, this is unlikely to change soon. If that proves to be the case, then deflationary pressures will persist and we’ll continue to see more of the same.
U.S. dollar rally ends with a plunge of 30% or more.
While the dollar is the strongest currency, there is a huge caveat … it the strongest currency for now. As an investor you have to be looking at what’s coming around the corner. You have to understand why some asset is strong or weak, and figure out where the Achilles Heel is. For the dollar, the Achilles Heel is America’s horrendous fiscal situation. I can show you on a single chart that fundamental dollar strength is a function of a strong, underlying fiscal situation in America … while fundamental dollar weakness is a function of hideous fiscal situations in America. And today, despite the dollar’s strength, we are a hideous country fiscally. Proof? Our monolithic debt, that will ultimately destroy us.
Dollar strength today is a function of specific issues tied to Japan and Europe. We’re rising only because the situations elsewhere (neither of which have anything to do fundamentally with the dollar) are forcing the dollar higher. All of this will change. Period. There is no other option, unless Congress magically creates a solution to American debt and bloated social welfare programs that are consuming larger and larger pieces of the U.S. budget. No one expects that to happen anytime in the next decade. As soon as the world attention is off of Europe and investors once again focus on the fundamentals underlying the U.S. dollar … the greenback sinks like the dead weight that it really is.
The fall will see the dollar index reach new lows, which means a decline of 30% to 40% from current levels.
Gold soars to $11,250 per ounce
Lots of commentators talk about gold having had its day in the sun, and that that day is done.
Gold ran up to $1,900 on speculation. All the hot-money investors flooded into gold because the trade was working – no other reason. When the trade stopped working, the hot-money evaporated and gold found its natural level in the $1,200 to $1,300 range. If gold were truly dead, then it would have collapsed to $200 or less, the level from which it began its historic run. But why did it not sink? Why did it reach $1,200/$1,300 and suddenly stop?
Gold is sending a message: There is a very real risk of a Western currency crisis to come. The West has accumulated far too much debt, and has no honest way to repay that debt without default or radical taxation. Gold – a currency, not a commodity – is acting at the currency of last resort now. It has become a currency insurance policy against Western government stupidity.
We are already in an undeclared currency war, a race to the bottom globally as nations try to revitalize economies made moribund by too much debt and too much government. When the crisis comes, gold will soar.
How much will it soar? Well, applying the Bretton Woods standard to America’s current gold holdings (258.6 million ounces) and our monetary base ($3.8 trillion) implies a “shadow gold price” of $11,250. But maybe applying a 100% gold-coverage ratio is too high. Maybe the right number is 50% - giving us gold at $7,500 an ounce. Maybe its 25%, which means gold at $3,800 per ounce.
No matter how you value it, gold is radically mispriced today relative to the size of the monetary base and the very real risk that the quantity of Western debt overpowers governments’ ability to control it – as well as the governments’ inability to ultimately control the beliefs of people who will not allow their wealth to vanish because of inept government fiscal and monetary policies.
When Western governments realize that the failed Keynesian model of printing more and more currency units, and taking on more and more debt, is not the answer to fixing the problems of the global financial crisis, gold will take on a life of its own. The rally from the 1999 lows of $250 an ounce to more than $1,900 in 2011 was just a preamble to what’s in store.”
They’re getting hammered only because the dollar is rallying right now. Commodities move in opposition to the dollar, and right now we have a fear-trade underway that is not very different than we saw in the aftermath of the U.S.-caused global financial crisis. Investors around the world are dumping assets to own the dollar because they are unsure of all the gray swans that are swirling around the world … the Federal Reserve’s pending actions; the success of the ECB’s QE program; China’s economy; Japan losing control of the yen; a Greek exit; Russian sanctions; ISIS’s impact on energy markets if it gets control of an oilfield in southern Iraq or Saudi Arabia; the impact of the strong dollar on debts in Southeast Asia and the risk of an Asian currency crisis.
Each of those has the potential to create a global financial catastrophe … and so, investors are simply hiding out in the dollar and dumping commodities.
When all of this passes, the dollar declines again, and the world gets back to focusing on the factors that drive the global economy … namely, the rapid increase in the global middle class that is reshaping the developing world. Those are commodity-hungry consumers, and their demand will assure higher commodity prices in the future. We are simply in a temporary dollar-strength pattern because of globalized fear.
This too, shall pass.
Thank you to all our friends for those sage words of wisdom.
While our friend’s opinions are very important to us, yours are as well…
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