World Paper Currency Values Race to Bottom|
March 24, 2009
For some time, a number of analysts have suspected that the Federal Reserve was secretly purchasing U.S. Treasury debt as a means to support the value of the dollar. Last Wednesday, March 18, the Federal Reserve openly announced that it would be purchasing $300 billion of Treasury debt.
Upon this announcement, the U.S. dollar index immediately fell 2.5 percent and the price of gold soared more than $50. The purchase of U.S. Treasury debt by the Federal Reserve is an outright increase in the money supply. In other words, it is blatant inflation. The U.S. government has now publicly revealed its decision to sabotage the value of the U.S. dollar in order to support the U.S. stock markets.
Many more American and foreign holders of U.S. dollars now realize that they need to move more of their wealth out of the U.S. dollar and U.S. dollar-denominated stocks and bonds into other safe havens - such as gold and silver. Of course, those who realized what was happening several years ago have already had the opportunity to protect themselves at more advantageous price levels.
Last week's action by the Federal Reserve did not occur in a vacuum. The Swiss central bank recently announced a deliberate policy of devaluing the Swiss franc against other currencies. The Bank of England has also announced that it will create an enormous amount of new paper currency to try to cure the United Kingdom's financial problems. The European Central Bank is expected to match these moves (if the internal stresses threatening the euro zone don't bring down that currency first).
With governments around the world seeking to lower the value of their currencies as a way to manage financial crises (to more easily pay back massive debts and to stimulate exports), tangible goods, especially precious metals, are almost certain to rise in price.
It's not just private parties who are now buying gold. Russia's central bank, at least one national central bank in the euro zone, and at least two South American central banks are openly adding to their gold reserves. Several other central banks are suspected of secretly adding to their gold reserves. If very many more central banks start to openly add to their gold reserves, we could see an all-out gold buying/currency dumping frenzy.
Here's one more indicator that could foretell a near-term explosion in the price of gold - the backwardation of silver prices in the London market. In normal commodity markets, contracts for delivery in future months trade at a premium to the current, or spot, month. In general the premium is tied into prevailing interest rates. Such normal markets are said to be in contango. When there is an unusually strong demand for immediate delivery commodities, it is possible that the current spot month price could exceed the price for delivery in future months. This condition is called backwardation.
The London silver market has been in continuous backwardation for about two months. This portends an imminent supply squeeze that could spill over into other precious metals markets, with much higher prices for all of them.
When Warren Buffet's Berkshire Hathaway bought 129.7 million ounces of silver contracts in 1997 for delivery in early 1998, then requested physical delivery instead of rolling over the paper contracts, the price of silver soared. On Aug. 6, 1997, the closing U.S. silver spot price was $4.30. Six months later, on Feb. 5, 1998,, it was $7.23, a 68 percent increase. Late last year, Warren Buffett spent about $7 billion buying shares in Goldman Sachs and General Electric. Even with the recent stock market surge, he has lost a substantial portion of these investments. I guarantee you that if he had instead put the same amount into purchasing silver for physical delivery, Buffett would be in a huge profit position today.
Compared to the trillions of dollars that are flooding the paper asset market to try to stem the downfall, it would take a comparatively trivial amount of investor interest in buying gold and silver to send prices to double or triple current levels.
Notes on last week's column: The best information I have as to the source of the gold that was dumped onto the market on March 6 in an effort to drive down gold prices is that it came from exchange-traded funds (ETFs). Many ETFs are allowed to lease gold, though I suspect an intermediary (ultimately I believe to be the U.S. government) subsidized leasing gold at a loss that day.
Also, several readers who contributed comments on last week's column wondered how long the U.S. government might be able to manipulate gold prices. A 1961 document prepared for the Federal Reserve outlined how the U.S. government could do so. I personally think that the available documentation points to manipulation going back at least to the mid-1990s.
Someday the U.S. government will run out of assets and other tactics to suppress gold prices. The facts that it has been unable to prevent the nearly quadrupling of the gold price during this decade and that the manipulation has become more obvious as time goes on lead me to expect that the U.S. government is getting close to the end of its ability to suppress gold's price. How close are we? No one knows for sure. Those in the government working on the manipulation are not talking, if even they have any idea. But if you consider that the gold price suppression may have been going on for decades, however long it takes for gold to reach $1,500, $2,000, and higher will seem short in comparison.
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On March 24, 2009 Rick Boswell
On March 24, 2009 Dale
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