Tuesday, May 11, 2010

Gold and Silver Soar as Confidence in the World's Currencies Crumbles

Alrighty, It's time for some metals talk.

Gold and silver soared today despite another huge move in the dollar as investors continue to worry about the real value of the world's currencies.

Let's take a look at the tape:

Gold futures:

Silver futures:

My Take:

As you can see above, gold has now hit an all time high soaring to over $1235 an ounce in the futures market as we speak. We also saw a huge spike in silver as seen above in graph #2.

This is not an inflation adjusted high for gold, but this point is irrelevant because the reason that gold is rising is not about fears of inflation like we have usually seen in the past when gold has soaring.

The reason gold is flying higher is because it's clearly the only currency left that's not being destroyed by a major central bank. Trust me: The bankers would love to debase it if they could, but they can't because gold and silver have an inherent value that's been established for thousands of years.

The destruction of the Euro after Europe's trillion dollar sovereign bailout announcement has forced the market makers to re-evaluate the value of all currencies IMO.

They are beginning asking themselves: Could the dollar and Euro be worth nothing if they are backed by nothing more than governments that are currently being strangled by trillion dollar deficits?

About a year ago gold would always sell off hard anytime we saw a jump in the dollar. This has no longer been the case especially since Europe has fiscally blown up thanks to the PIIGS. Gold has actually hit new highs despite the huge rise in the dollar. This is something to seriously take notice of!

The reason gold is ignoring the huge rise in the dollar appears pretty clear: One currency that rises versus another currency isn't all that impressive if BOTH are essentially worthless as a result of the massive debts that back both of them.

This has created what I call "The Value Crisis" where investors are beginning to realize that there is nowhere to hide in this market.

I mean look at the current options for investors:

- Munies: Ummm no thanks I'll pass when many states are on the brink of bankruptcy.

- Treasuries: Heh...Works for now but for how long as we continue to run trillion dollar deficits?

- Stocks: Do I really need to explain this one? P/E's are worse that they were during the tech bubble. Enough said.

- CD's: 0% interest and they are guaranteed by a government that is fiscally bankrupt. Wow how tempting!

- Money markets: 0% interest and the same issue as CD's.

- High yield bond funds: Good luck with this idea. This was a nice ride in 2009 if you caught it but it's over now. Most of these funds hold mainly BBB rated debt. This is not where you want to be heading into a fiscal funding crisis. Getting an 8% dividend when your principle investment could drop by 50% as our debt spreads widen as a result of our debts is hardly the place you want to be.

So whats an investor to do? Tough call but one thing is for sure: Hard assets are a place you need to be with at least some of your portfolio because they hold real value.

The Bottom Line:

Let me start by saying that I am by no means a gold bug. However, I own gold and silver based on the thesis that there is a very good chance that many currencies will be worth practically nothing when this is all said and done.

I say this because the dollar and the Euro are being backed by nothing other than "guarantees" by the US government and the ECB. Meanwhile both central banks continue to spend well beyond their means and have created seemingly insurmountable debts as they desperately attempt prevent the credit bubble from bursting.

This being said, are there some currencies that will do well? Sure. However, the biggies like the Yen, US dollar, and the Euro are all in deep trouble.

To give you an idea of how insane the FX markets have become: The Yen has been rising versus almost all currencies and their debt to GDP ratios are the worse than Greece!

I will continue to hold my metals based on the thesis that these currencies will continue to decline versus gold as the world's central banks continue to throw their money out of helicopters.

Keep in mind there is also another reason to hold metals: If the economy does get some legs then there will be an inflationary boost for Gold that should take prices even higher.

When you think about metals keep one thing in mind: All of these banks have no choice but to print money because their will be a global deflationary depression that will lead to wars if they try and stop.

The political will to take the pain simply isn't there. Greece is a perfect example. There are more protests later this week. God only knows what will happen as these mobs grow increasingly angry. Trend author Gerald Celente said it best: "When people lose everything they lose it!"

These are tough times for an investor. Hold some hard assets in your portfolio and stay diversified.

The central bankers around the globe are printing like mad, and they can't afford to stop because the reprocussions are going to be devestating when they do. And there will be a time where they stop because this is unsustainable just like any other bubble is.

The moves in gold and silver today will keep the bankers up tonight. This is the one currency that they can't debase or manipulate(other than trading) ,and it scares the heck out of them because it makes all of the paper dollars that they hold in their banks less valuable.

Disclosure: Own GLD and SLV in retirment accounts. Short treasuries via TBT.


getyourselfconnected said...

hey Jeff, nice piece!

I love this part:
"The reason gold is ignoring the huge rise in the dollar appears pretty clear: One currency that rises versus another currency isn't all that impressive if BOTH are essentially worthless as a result of the massive debts that back both of them.

This has created what I call "The Value Crisis" where investors are beginning to realize that there is nowhere to hide in this market."

I think if China's bubbles bust then US treasuries are in for a bad time. Of course the FED will just issue money to the banks to buy the bonds, but then gold and silver will really run. It's all coming together.

Long gold and silver (physical) but you all know that.

jeff said...


Thanks bud

Futes were down pretty hard after hours but they have popped back up.

I can't wait until the treasury sales later this week. If those don't go really well then the whole bond market could panic.

My guess is the Fed will do everything in its power to make sure those go well because they realize how panicked the vigalantes are about soveirgn debt.

Should be interesting to watch!

Anonymous said...

great job. its flight to safety; gold and the dollar will continue to rally amongst speculation that the euro will recover. the hyper hedges of FEAR and systemic downfall are physical cash and physical gold; now we're seeing the digital version of this.

who knows what will happen from here. you have it exact in your analysis; i think the european countries left to bailout will hoard resources with credits and debt, and threaten default to get bailouts; it will be aa trade of physical, real assets for phoney digital credits and debt and this will raise the debt loads exponentially as they KNOW they will be bailed out. irelnd and spanish gov's will start hoarding real assets now, all while they "encourage" rioting and domestic unrest to build up leverage for their bailout.

Anonymous said...

us gold and silver people are so anti establishment. we must have a 'phantasmic outer form of terror' to the NWO and financial elites. (insert evil laugh here)

jeff said...


Thanks a lot.

Yep thats the way I see it too. Create total chaos and then blackmail the world to bail you out.

Its the "Wall St." version of an European economic meltdown. Instead of credit debts from housing bubble its soveirgn default debt.

The issue is the same: DEBT.

I don't know how this ends either but its not going to be pretty. I think we have Greek riots scheduled later this week. That should be interesting to watch.

Crazy world. Futes back down again to -5 as I type.

jeff said...



Hate to see what any form of terror would do to gold!

Anonymous said...

i just imagine what the irish and spanish riots will be like.

Jeff said...


Who knows...The irish will probablybe all boozed up and probably won't even remember the rioting!

Anonymous said...

"I think we have Greek riots scheduled later this week."

I think you mean protests right? I cant imagine they actually "schedule" riots :)

Jeff said...


Oops. Typo Got a little ahead of myself there. Nice catch:)

Gold and Silver soaring again today!