Wednesday, August 26, 2009
The US Dollar Versus Gold - Flea on a Bull's Back
Gold versus paper. That's the real battle under the surface. This is the more important battle from a societal standpoint. Honest money or crooked money. Humans will always cheat, steal and lie, but when a system is set up specifically to promote cheating, stealing and lying, this is exactly what happens on a large scale. Though we were only on a quasi-Gold standard from 1934-1971 in the United States, it at least provided a modicum of restraint. Before 1933, we were on a fairly "pure" Gold standard for several decades.
Let me ask you an important question: do you think the United States was prosperous and grew like crazy as an economy on the whole from the 1880s thru 1971? Do you think that our rate of growth was too slow because we were on an archaic Gold standard?
Now, let's look at the period from 1971 through today. During this 40 year period, we had an inflationary decade that was the worst of the century for this country (the 1970s), we had rolling asset bubble manias and collapses in internet stocks and real estate, and now we are entering an economic depression that will last 10-25 years. Baby boomers have now had their life savings chopped in half (or more) in aggregate over the past decade and it's going to get worse for them if they don't get out of debt and get out of the stock market (which they won't, in aggregate, until we are near another stock market bottom and real estate has gone even lower). So, yes, a fiat system is great if you're a central banker or federal apparatchik looking to raise banking profits or expand the role of government, but not so good for the masses who sold themselves into paper debt slavery to the bankstas and still rely on the soon-to-be broken promises of government.
So don't tell me that we can't prosper as a nation on a Gold standard and don't tell me it's too restrictive and archaic for the modern world. It's bullshit and the people who say otherwise are either ignorant (the majority including most politicians) or nefarious (the central bankstas and some federal politicians). Despite my distaste for our current monetary system, I know that it is entrenched and it will take a major disaster (yes, worse than what we've already gone through) to get people seriously looking for a viable alternative.
So, it is a deflationary crash and depression for now, which will paradoxically increase the value of the U.S. Dollar despite it being backed by a bankrupt government. This increase, however, is a temporary respite from the terminal storms that await the U.S. Dollar in its current form. Though we may stay on a fiat system rather than turning to sanity initially, we certainly won't be staying on the system where the U.S. Dollar is the reserve currency of the world for the rest of our lives.
This is an important concept that Americans need to grasp to understand why Gold is so important as portfolio insurance and an international debt-free currency. Gold is money and this is why central bankers and governments own it and list it as a monetary reserve on their balance sheet. If Gold is not money, why do governments and central banksters own it and why don't they list it on their balance sheet with other assets like land? Why does government ignore its own definition of money and hoard the very form of money they ridicule and think is outdated? Do as we say, not as we do!
Gold is in a long-term bull market that has not ended. The value of Gold relative to other asset classes like stocks, corporate bonds, real estate and all international currencies is rising and will continue to do so at least until the Dow to Gold ratio reaches 2 (and possibly 1 or less). If cash is king during deflation, Gold is the best form of cash to own because cash unsecured by debt is more valuable than paper backed by promises. Also, keep in mind that trust in paper promises (i.e. those of government, bankstas and Wall Street) is breaking down. This is a social turning point that will force stocks back to a reasonable valuation (with a 12 month trailing PE ratio of greater than 120 on the S&P 500, we've got a long ways to go).
So, where are you going to put your money? Well, for the novice investor, you want to be out of stocks, out of corporate bonds, out of commodities and out of real estate. That doesn't leave many options. You're essentially left with cash and government debt (pick federal over municipal!). Where I am trying to help with this rant is by reminding people that Gold is cash and it is a better form of cash than the U.S. Dollar long term.
I actually think the U.S. Dollar is going to rise significantly from current levels over the next few months. I also think Gold is going to rise. For those who can only think in terms of "Dollar up, Gold down" and vice versa, this doesn't make sense. But for those who understand that Gold is an international currency that acts as a barometer of the health of all fiat currencies currently in existence, it makes perfect sense.
I like the potentially developing parallel with the 2004-2005 time frame when thinking about what will happen with the Gold price this fall. Gold has been building a price base for the past 17 months to get ready for its' next leg higher. The U.S. Dollar has been correcting over the past 8-9 months. My belief (not one I plan to trade) is that the U.S. Dollar is about to have a powerful intermediate-term advance. Gold will take an initial hit as traders and commodity bulls dump it, but will then stabilize and launch higher.
Here is how a similar pattern emerged in 2004-2005, using a 20 month daily chart superimposing the price of Gold (green area plot) and the U.S. Dollar Index (black linear plot):
So, I don't know exactly when the Gold correction will end, but I do believe another buying opportunity lies ahead for patient investors. Physical Gold is more valuable and more reliable than paper Gold (e.g., the GLD ETF). I also believe that Gold will break out to new highs and $1000/ounce will become the floor for the Gold price instead of the ceiling. All fiat currencies are sinking relative to true debt-free money. Gold stocks should not be bought on strength, but on weakness. We are going to start the next leg down in the cyclical general stock bear market this fall, which is far from over, and it is going to be a brutal decline.
Though Gold stocks will take a hit with general stocks when the selling gets bad, they made multi-year lows during the fall Panic of 2008 and will not be making new lows like the general stock indices. However, there is no rush to buy senior Gold stocks and I certainly wouldn't buy them right now. I continue to wait patiently for a good buying opportunity in this sector. I am hoping that Van Eck Global's junior Gold miner ETF (pending ticker: GDXJ) will come out soon, but at this point there is no news (please holler if you hear something!).