Nifty Intraday Strategy - 30 October 2009

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Abandoning The USS Dollar

Jennifer Barry says .....

Robert Fisk's article in The Independent on October 6, "The Demise of the Dollar," has created many shock waves in the currency markets. Fisk reported that major Arab nations are secretly planning to dump the current petrodollar scheme in favor of pricing oil in a basket of currencies. Included in this basket will be the yen, yuan, euro, a new, pan-Arab currency, and gold bullion. Co-conspirators include Saudi Arabia, Russia, Brazil, China, France, and the formerly compliant Japanese. This validated my July prediction that the Persian Gulf states will eventually accept yuan in exchange for oil.

It's no accident that three of the four BRIC nations are active participants in this plan. The leaders of these nations have moved beyond BRIC being a theoretical construct invented by Goldman Sachs in 2001. They have formed an actual alliance based on common goals, cooperating both politically and economically.

The BRIC governments also share a distrust of American motives. Asserting their growing independence, Brazil, Russia, India and China held their first formal conference this June in Yekaterinburg, and the United States was not permitted to attend as an observer. They understandably didn't want to share the details of their tactics to lessen their exposure to dollar depreciation. The leaders of the BRIC countries have already publicly discussed purchasing each other's bonds and engaging in intra-group currency swaps. Two of the nations - Russia and China - are members of the Shanghai Cooperation Organization (SCO) who have agreed in principle to using regional currencies in trade.

Every member but Russia has committed to purchasing IMF bonds denominated in Special Drawing Rights, which includes such non-dollar currencies such as the yen, euro, and pound. The nations have a combined holding of $2.8 trillion in USD reserves, so any commitment to sell dollar instruments or even lessen the scale of purchases is a serious threat to the currency.

While many of the governments involved have denied oil plan, it fits in with the alternative currency initiatives already announced. In addition, the Gulf Cooperation Council's move toward monetary union is far from unique. Just two years ago, former Mexican President Vincente Fox mentioned on Larry King Live that he had discussed a single currency for the Americas with President Bush, but this was part of a "very long term" plan. In April 2008, the 10 ASEAN countries (Association of Southeast Asian Nations) met to discuss "monetary integration" and cooperation with regional non-members China, South Korea and Japan. Even the Bank for International Settlements called for eliminating national currencies and forming regional currency blocs "based on the dollar, euro and renminbi or yen" in 2006. It makes sense that nations would collaborate to form currency life rafts to survive the eventual sinking of the U.S. dollar, now listing badly to starboard.

Gold Shines Again

Despite the fact that most Western financial advisors and economists perceive gold as an oddly fetishized commodity, the global majority understands this metal is the king of currencies. I view this inclusion of gold in a monetary basket as a transitional state to a gold backed currency.

After all, this possibility was broached a few months ago at the July G8 meeting. Gold coins imprinted with the slogan "Future World Currency" were presented to each of the world leaders. Originally designed to unite Europe with the United States, Russian President Medvedev expanded its scope and touted it as the new "supranational currency." While China was not present at this meeting, its steady drumbeat of complaints about U.S. monetary policy suggests it was behind this initiative.

Nevertheless, I don't believe either President Medvedev or President Hu of China actually wants to unite the globe under one monetary standard, even if it uses gold coins. Instead, they are clearly trying to move from the current dollar hegemony to a system of competing reserve currencies without crashing the global economy.

Each country has ambitions to supplant the U.S. dollar with its own money. Medvedev hasn't been shy about expressing his desire to convert the ruble into an international medium of exchange. China is now selling yuan-denominated bonds outside its borders as an intermediate step toward forming a globally traded currency.

Many nations from South Africa to Argentina have purchased bullion for their reserves, but China has the inside track when it comes to replacing the USD with an alternative hard currency. China has much larger forex reserves with which it can acquire assets, and it didn't suffer a depression at the turn of the century as Russia did.

As I explained in my July article, "Gold, the U.S. Dollar and the Yuan," the Chinese have a long term goal to become the pre-eminent reserve currency. The government allowed the private ownership and sale of gold by their citizens in 2002 in order to re-monetize the metal, and now they are promoting silver purchases as well. The Chinese know they must step in to facilitate the move back to hard money.

Chinese officials are aware of the significance of the bailouts I discussed last fall in my essay, "The Dollar Is Doomed." Despite rhetoric to the contrary, the situation has only worsened over the past year. The potential liabilities have increased to $23.7 trillion, according to the TARP's special inspector general, Neil Barofsky. The tremendous inflation of the money supply was billed as a necessary rescue of the global financial system, but in reality, the U.S. will effectively default on its obligations through hyperinflation.

In the meantime, China is scouring the world, securing gold and hard assets in exchange for its dollar promises. The Chinese will swap this paper for bullion as long as counterparties are willing to make the trade. Fortunately for them, Western central banks continue to unload gold both openly and surreptitiously in order to make their currencies look solid. Nonetheless, if these nations don't curb their reckless spending, they will find their global influence draining away even faster than the metal China is actively acquiring.

With due apologies and full credits to the author

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Deferring Financial Disaster

James West says .....
Those who read the contrarian and alternative financial commentators may well be forgiven for wondering why the financial doomsday oft predicted hasn't quite materialized. The financial crisis heralded by the crash in October 2008, preceded by the demise of Bear Stearns and Lehman Brothers, among others, by all accounts was the tip of the iceberg and the advent of the Great Depression of our age.

Exuberant markets and slap-happy finance ministers, combined with record profits at the investment banks of Mordor, or Wall Street, are supposed to convince us that the worst is over, calamity has been averted, and with sober and moist eyes we roll up our sleeves to prevent the ghosts in the machine from re-emerging. A more masterful symphony of optical delusion has never been conducted, and the invisible puppeteers manipulating the strings of marionettes Ben Bernanke and Timmy Geithner are smug in their continued anonymity.

Meanwhile, unemployment continues to rise, foreclosures and delinquencies ditto, and but for select industries, decline and bankruptcy are the measure of balance sheets, not growth.

The principle tool of deception for this motley crew of G7 finance ministers and the Invisible Hands that control them is currency. With these key economies now flush with capital in the uppermost layers, victory can be claimed by pointing to the balance sheets of those institutions who have averted disaster by capturing the lion's share of this manna from heaven. That the capital is not filtering down meaningfully into the broader economy in the form of investment and lending is the clearest sign that the worst is yet to come, and we now merely pause in the eye of this economic hurricane.

Keep in mind, if the Great Depression that started in 1929 is a fair analogy, then we are in the autumn of 1930, and the peak of contraction globally did not manifest itself until 1933, when unemployment in the United States reached as high as 25% in some areas. Within that four year overall plunge were several mini-bull rallies that lent solace to the fearful, albeit temporarily.

The major difference between the period from 29-33 and now is that the governments of that era did not have either the ability or the willingness to print money with abandon, because they knew that the outcome of such policy would certainly be future inflation, which would itself handicap any chances of recovery.

Since we now live in an era where its only what is happening right now that matters, the financial overseers seek solutions that immediately repair the illusion of prosperity in perpetuity, even if it means a smaller and smaller percentage of the population is fooled.

The act of printing currency with abandon equates to deferring the financial reconciliation required to achieve balanced budgets into future generations. As long as we print money, and agree to value that money as legal tender, the illusion can go on ad infinitum.

But what happens if, from the bottom up, people start saying "Hey wait a second…this cash is counterfeit!"?

Well that's what is happening with the price of gold. Even the government of China is hedging its bets that its own currency will suffer devaluation in lock-step with the excess of U.S. currency afloat. After all, China's foreign reserves are the largest collection of American funny money there is outside of America.

So despite the glad-handing and cheerful sentiment echoed by the mass media controlled by about 7 men, the financial disaster continues to unfold, and the only reason the masks are still on the players in the ersatz performance is to pick clean the pockets of those susceptible to such disingenuous rhetoric.

For the rest of us, preparations must be made for the next leg down.

There are two things to own going forward. Precious metals and the companies that mine them. The very worst tsunami is a boon only to the surfers crazy enough to catch the wave, and that will exactly be the situation when the fragrant chile hits the fan part 2. Instead of a thrill though, the owners of shares in mines that produce gold will be rewarded with financial security in perpetuity, barring unforeseen acts of foolishness.

Gold producing operations will soon see their valuations increase dramatically. Lifted on that rising tide will certainly be soon-to-be-producers and to a lesser extent, explorers of advanced economic deposits.

The long term deterioration of the U.S. Dollar has been underway for decades. Its days as a viable currency are numbered. History proves this. Buying gold and gold related assets will soon also reveal itself to be the only sound investment of the next 10 years.

With due apologies and full credits to the author

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Gold is a Bargain, Even Above $1,000

Michael J. Kosares says ......
Despite a four-digit price tag, gold remains a relative bargain when a little perspective is applied.

The inflation-adjusted price of gold at its 1980 peak is just over $2350 — that leaves a considerable amount of headroom just on the basis of making up for past inflation, let alone the prospect of continued inflation.

The gold rally of 1970-1980 began in much the same way as the current rally, eventually catching up with inflation, ultimately pushing significantly higher to price-in future inflationary expectations. Having said that, we could indeed still be a long way from any potential top.

The new gold market began in 2002 and is now in its 7th year (in 2009). In terms of cycles, the gold market may have years left to run, consistent with the bullish implications of inflation-adjusted gold.

Jim Rickards, director of market intelligence for Omnis, said in a recent CNBC interview that the Fed is going to have to manage a 14-year devaluation of the dollar – by as much as 50% — with the goal of inflating away a portion of our massive and still growing debt.

I believe Rickards chose a 14-year timeline because it equates with 3.5% to 4.0% inflation over the period. An oppressive inflation rate to be sure, but shy of true hyperinflation. If Rickards’ assessment is accurate, it likely equates with at least 14 more years in gold’s bull run.

Unfortunately in this age of instant gratification, most investors tend to focus on the short-term, when it is the long-term that really matters. Examining the more familiar secular bull market in U.S. equities provides an opportunity to perhaps ascertain where we might be within the current bull market in gold.

The first gold bull market lasted about 13-years, beginning in the late-1960s and lasting to the early-1980s. After a few years of adjustments, the bull market in stocks began around 1982 and lasted until 2007, with a brief respite when the tech-bubble burst in 2000, which was quickly offset by extremely loose monetary policy.

During the 25-year bull market in stocks, the DJIA went from a low of 770 to a 14,480 high — up nearly 19 times. In its first seven years, 1982 to 1989 stocks rose roughly 3.6 times — or roughly 15% of the complete move. Similarly, gold during its first seven years has appreciated roughly 4.0 times having started its bull move at $250 and trading in 2009 at just over $1000 (1032 high as of this writing), and we are not yet at the end of the year.

Some analysts believe the DJIA/Gold ratio is heading back to a not unprecedented 1 to 1 ratio. The chart above shows that such a move is very feasible and could be attained by a dramatic rise in gold, a dramatic drop in the DJIA, or more likely some combination of significant gold gains and significant stock market losses.

If gold were to continue to track the stock market’s bull market performance, gold would top over the next years in the vicinity of $4750 per ounce. Will $1000 gold represent less than 25% of the gold market move?

Of course, any number of events could intervene to prevent gold from reaching that level, or vault it even higher.

As an example of the latter, take into consideration the nightmare German inflation that took hold in the period between the First and Second World Wars. Famed economist John Maynard Keynes summed it up nicely: “The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.”

At the beginning of World War I in 1914, an ounce of gold cost 86.8 marks. By November of 1923, the hyperinflationary blowoff drove the price of an ounce of gold to a staggering 63,016,800,000,000 (paper) marks. (Yes, that’s 63 TRILLION marks!)

The following chart shows the ascent of one gold mark in relation to one paper mark. Invert the chart, and you have an illustration of the demise of a fiat currency in just a few short years. Similar events are unfolding even today, where an ounce of gold was not available at any price in terms of Zimbabwe dollars as a result of massive money printing.

I’m not suggesting things are likely to get as bad as Weimar Germany in the 1920s, but none of the conditions that have shepherded gold above $1,000 on several occasions now have suddenly gone away. In fact, one could argue that they have accelerated of late, resulting in the first ever monthly close above $1,000 (September 2009).

At the end of the aforementioned CNBC interview, host Joe Kernan says to Jim Rickards, “You just made a heck of case for buying gold right at $1,000…”

It would seem there are any number of cases for such action.

With due apologies and full credits to the author

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