The Federal Reserve: Putting out a fire with Gasoline!
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| Topic: Other — September 9th, 2007
The Federal Reserves answer to the problem caused by too much money in the system is to print more money. Further dilution of the once almighty dollar continues with it dropping two cents over the last three weeks for a loss of 2.4%.
On the other hand gold has gained $40.00 over the same period for a gain of 6%.
Take a look at the chart comparing the progress of both over the last few years and you can see the divergence growing ever wider. Gold has been telling us that all is not well for some time now, the only question that remains is just how sick is the dollar.
So long as the Fed believes that liquidity is the answer and are prepared to pump more money into the financial system then we can only see further weakening of the Dollar and further strengthening of gold. As investors begin to realize that gold not only offers a safe haven for their wealth it is also offering attractive returns as demonstrated by Fridays close of $700.10/oz. Many believe that gold will go on to challenge its historic high of $850/oz thereby attracting the interest of those yet to discover this sector of the market. Our belief is much more bullish, as regular readers will know. We think that gold is now entering a period of acceleration, which will be boosted when the blindfold wearing Federal Reserve goes into overdrive with a rate cut.
Look at this chart of the US Dollar trying to cling on to the much watched ‘80’ level. Now remember that for every tick downwards the holders of the massive amounts of dollars get hurt. As we write we can imagine urgent meetings are been convened to devise a strategy that will protect their wealth. Some will remain holders of the dollar, some will instigate a stop loss position at a lower level and some will be hitting the sell button next week. Ask yourself the question: You have just lost 2.4% in three weeks in an asset class that is in a severe downward trend do you reduce your exposure or not?
Well I guess that you know our answer.
Now look at the chart for gold. We can see that gold is making steady progress against the dollar and has been for some years now. The trend is your friend! The sooner you moved some of your wealth into precious metals and their associated stocks the better off you would have been.
Is it too late you ask? In our humble opinion the cracks in the financial system are only just appearing, but they are a precursor to crumbling and possibly a collapse of the financial system, as we know it today. With every crack comes another convert to precious metals as they will march relentlessly back to where they belong, the only true store of wealth. Gold and Silver cannot be devalued by a printing press or a rate cut. The performance of gold and silver is earning the respect of investors while more and more the words of politicians fall on deaf ears.
Next week could see a slight rise in the dollar but come the 18th September, which is when we anticipate a rate cut, the dollar will continue to depreciate rapidly. Investors will look elsewhere to invest and some of that wealth will be placed into this sector of the market. This is a small, thinly traded sector, which is about to be turbo charged by a flight to safety.
Go metals go!
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I agree with your excellent analysis and am certainly bullish on the precious metals. One question - after the significant move up and through $700 this week do you see the action continuing as people take note, or do you see a (temporary)retracement given the levels of the rsi and macd?
Comment by bob — September 9, 2007 @ 1:59 pm
I have invested heavily in precious metals as well as metal mines and also energy stocks and have no intention of liquidating those investments in the forseeable future. However, I would like to point out that though I may own a lot of the above mentioned stocks and bullion, the worth of those holdings is expressed in guess what—dollars. dollars which are losing value avery day. Is the day coming when I will have to go grocery shopping with a wheelbarrow full of gold to pay for my groceries? Or maybe I will have to carry some gold bars in my car when I have to go to the gas station to ‘fill up’.
All those things (gold, mining stocks,energy stocks) will increase in value I’m sure! But how is that value expressed or represented? It is expressed in worthless paper dollars!
I do not see a way out of this contradictory situation!
ps: I dont believe ‘contradictory’ is a valid word, but I think it fits here.
bobi
Comment by bobi — September 9, 2007 @ 6:30 pm
Thank you SOOO much for your emails. I think your perspective is outstanding.
Only one suggestion..you are very quick to report the decline in the value of the $, but you rarely point out that the $850.00/oz record high in gold was in 1980.
Should’n we be saying that the record high for gold is $1500.00/oz (1980 $’s) or so. Let’s compare apples to apples?
I an an absolute gold bug and have all the confidence in the world, that gold (and mining stocks) is the place to be.
However, lets be honest, $700.00/oz is only half way home to equaling the “all time high”.
Thanks again…dk
Comment by Dan Kubly — September 10, 2007 @ 10:00 pm
Dear Bob,
I’ve been saying this for a long time, but I can not
recall seeing anyone put it in print before your
article and I’ve been doing a lot of reading. it is
amazing the deference and respect paid to Alan
Greenspan- Woodward writes “Maestro,” the Queen
knights him, but if he were a horse instead of a
horse’s ass, he would have been named Gericide-
perhaps, since you have an audience you could suggest
in your next piece a new law forbidding Federal raises
greater than that of the stated stated CPI index.
Before Nizon, the American (and I suppose
pre-touchy-feely English) public, many of whom still
worked with their hands in mfg. or farming would not
have put up with this. The stage is actually set, were
people not so exhausted and dispirited, I think, for a
full-fledged French revolution scenario- the elected
officials live like royal courtiers, complete with
paid-in-full health care, flights on military jets,
and a lifetime pension after as little as one term of
office. The irony is that D.C. has gone from a sleepy
Southern town to a megalopolis full of paper-pushers
who would rise up against any curbs in deficit
spending- they can perhaps be appeased with more paper
money, but it will not keep up with inflation.
When you think about it, it was no accident that the
Fed and the IRS kicked off the same year- but who
suspected that the real goal was to put everyone in
the highest tax bracket! (I don’t know what kind of
tax forms they had to fill out in 1923 Weimar Germany,
but
it goes without saying that if they had a graduated
system, everyone was in the top rate then too.)
Regards, and keep punching. Do you think they will
pull a 1933-style gold confiscation again, or would
they be deterred by a tsunami of derisory laughing
from
the people who invented fiat- the Chinese. Robert
Comment by Robert — September 12, 2007 @ 9:14 am
DK,
You are correct gold should be trading at about $2200 if we adjust for inflation. We use to mention it a lot when we first started writing and we tend to assume that our readers might get bored if we constantly repeat the same data. Although it’s hard not to sometimes!
Comment by Gold Prices — September 22, 2007 @ 10:05 am
Robert,
Thank you we could not have put it better.
Half of the British work force is now tied up in the public sector which we are told is now paid better than the private sector! Its spend spend spend! An office has just opened near us that employs 8 people and its sole purpose is to explain to people the benefits of belonging to the European Union!
Unfortunately we just cannot think of one!
Comment by Gold Prices — September 22, 2007 @ 10:22 am