For 95% of the world’s population, the price of gold has already begun an explosive rally. “But gold is only $150 off the November lows” you say? Well yes, gold in terms of dollars is not yet up 20% from mid November …but, in terms of yen, pounds, euros, (especially rubles) you name it, gold has launched in price!
This of course is a function of the dollar strengthening an average of over 10% versus foreign currencies in just the past several months. My question is this, are dollars “up” as a function of them being a “safe haven” or is the strength “synthetic” so to speak? Another way to put this would be, have foreigners sold their currencies to move into dollars for “safety” or has the dollar risen because commodities have been sold?
You see, because commodities (oil in particular) had been purchased as a speculation on the reflation trade, these trades are being reversed as the real demand diminishes because of a weak global economy. Many of these long position have been blown up and forced via margin calls into being sold. This “unwinding” means that as the commodities are sold, the original loans (margin) for purchase have to be paid off …with dollars…and thus the recent demand for dollars causing the dollar to inflate versus foreign currencies.
The big argument by the deflationists has been the dollar would emerge as the “King” currency as safe haven buying entered the equation. This has been true versus other paper currencies (now with the exception of the Swiss franc), but not versus gold. The world is definitely experiencing a sharp slowdown economically, this is exactly why we very probably will hear from the ECB this coming week. As I have said all along, it is either “inflate or die” and Europe’s economy is definitely dying. In my opinion, we are standing directly in front of a fork in the road. Please don’t mistake this, I am not saying a “decision” has to be made because there is no “two way” decision available. The only decision is whether to do nothing, or to engage in further monetization.
In my opinion, QE, or more printing must and will occur. The fork in the road is how markets react to further easing. Do markets reflate? Or, do they throw a party for 24-48 hours and then just collapse? In my mind, this is really the only question because we have already seen that QE does not work in the real economy. At best, QE merely slowed or halted the economic decline, never did we see a real “recovery” of the real economy. This fork in the road is a big one, I believe it will be highlighted by both a currency crisis and a credit seizure. This is THE environment where gold shines and shows its true colors because it is the ultimate money.
The recent strength of the dollar versus foreign currencies AND gold strengthening versus the dollar means further “demand” for the front runner. Foreigners are being forced to find a safe haven because of the local “inflation” created by their weak currencies. This is happening at a time where demand for gold and silver were already far outstripping global mine supply. Where will the metal come from? The answer to this is simple, “it won’t”. Added supply will not come to market at current prices, the price must and will rise in order to coax the new supply to meet the demand, Mother Nature at her finest if you will. Another way to explain this is that because gold has been the best performing currency, holders of these foreign currencies are being “shown the way”. The market prices of gold in local currencies is illuminating their path to safety.
Going one step further than the current “deflation” the world is experiencing will be the default phase. This past week’s announcement by the Swiss was the catalyzing event. Many firms were bankrupted and margin calls galore were issued to an over leveraged financial system. My guess is we only have a week or two before some very important dead body(s), somewhere, floats to the surface which causes further panic, further margin calls and more breaks in the derivatives chain.
THE most basic reason to own gold is because “it cannot go broke”. It is in this very environment, in this very scenario that gold will perform best. The deflationists argue “gold will go down in a deflation and can only do well during inflation”. This is pure fallacy. THE best environment for gold is when even the best credits are defaulting. When default is in the air and behind every door you open, capital will flow into the only place where default is not possible, gold.
I remind you, the “door” to gold is a very small and definitely finite one. There is only so much of it. There is only so much of it “willing” to be sold. Another aspect is the newfangled “fractional reserve” position of gold. In order to suppress price (the truth), 100 paper ounces have been sold for every one and single real ounce. We will see not only panicked investors looking for safety trying to get through the golden door, we will also see those who previously “thought” they owned gold jamming the entrance.
For several years I have spoken of the necessity for a “re set”, the Swiss have now begun this process officially or by decree if you will. Many have laughed as I have written the scenario of going to bed with $1,500 gold and waking up to a bid of $4,000 gold and none offered. This is exactly what happened to a smaller degree with the franc/euro cross. It only took 5 minutes for a 30% move to occur. Why do question this cannot happen with gold? Did the Swiss not artificially depress the value of their currency by implementing the peg? Have we not shown you time and time again, evidence of gold price suppression? Is there any difference?
When it becomes no longer desirable, tenable or even possible to suppress gold, what do you think will happen to price? You have already seen your answer from the Swiss. It is for this reason I have harped that “trading” in and out of gold is very dangerous. You can make 100 trades, 99 of them profitable (good luck with this percentage!) and be “out” on just one… the wrong one!
When the re set of gold’s price takes place, you will either be in, or you’re out. If you are out, you will not be allowed back in until whatever “clearing” level is found. My guess is this clearing level will be multiples of current price! By the way, no one will tap you on the shoulder and tell you “when” this will happen but rest assured, the price of everything will be re set versus gold.
To finish, I believe the deflationists are 99.9% correct, the credit markets will in fact implode and be followed by outright economic depression while central banks throw a kitchen sink of printing at the debacle. The only thing they are missing is the fact that dollars are “part” of the credit structure. In fact, dollars are what is holding the entire credit structure up. History shows us that “liquid cash” is the very best place to be in a credit contraction. The only caveat to this is your “liquid cash” must be of the sort which does not and cannot “default”. Gold is the only liquid cash that is no one’s liability and thus can never default. Yes, we have an historic deflation dead ahead …this deflation will be in terms of gold, not dollars!
You have now seen and been warned of what a re set looks like by the Swiss. If you have not yet purchased all the gold and silver you desire or have the ability to, do it NOW at Miles Franklin! The coming credit unwinding will occur with no prior notice and at lightning speed!
Regards, Bill Holter