As I write Wednesday at 12:05 PM EST, gold has rocketed from a $20/oz loss to a $5/oz gain while the “DOW JONES PROPAGANDA AVERAGE” remains at its lows, the fifth such occasion this year that “Cartel Rule #1” will be broken if this relationship holds through the NYSE close – i.e. “thou shalt not let PMs rise when the Dow plunges.” Moreover, the Euro is in FREEFALL as genuine fear of what I have SCREAMED OF FROM THE RAFTERS FOR MONTHS appears highly likely – that is, the upcoming fragmentation – and possibly complete dissolution – of the ill-fated, 13-year-old Euro currency.
Given all the recent speculation of the Euro’s fate – short- and long-term – as well as Jim Sinclair’s baffling insistence that the “dollar index” will fall from its present level of 82.9 to the low 50s, I thought I’d “re-pen” what I have been writing for the past decade – i.e., the dollar index is meaningless. Today, I’m going to highlight a piece I wrote on this topic a year ago, which you can read in its entirety below. Remember, it was written just after the “SUNDAY NIGHT PAPER SILVER MASSACRE,” and just before the commencement of Global Meltdown II, the U.S. debt ceiling debacle, and ultimately, ALL-TIME HIGH gold prices…
The excerpts below describe the comical MSM devotion to the “dollar index” – essentially, a measure of the dollar/Euro exchange rate. As you can see below, it peaked in 2001, but has traded in a tight range of roughly 75-85 for the past five-plus years. The key takeaway of ANY discussion of exchange rates is to realize they are meaningless in real terms, as opposed to nominal terms wherein “profits”, “costs”, and “margins” are calculated. When Central banks debase currencies to increase such nominal measures, they don’t tell you that real profits, costs, and margins are diminished – if not eliminated – by the INFLATION caused by PRINTING MONEY to push costs down (particularly if the ensuing inflation data is fudged, as it is in the U.S.). A handful of “elites” – such as bankers and industrialists – benefit from the weaker currency, but the ENTIRE NATION is penalized by inflation.
That said, when it comes to this particular exchange rate, it is even more ridiculous to forecast, as WHO KNOWS what the Euro will even be comprised of a year from now? Will it just exclude Greece…or ALL the PIIGS…or fully intact? And how does one determine if Europe will be “better off” or “worse off” than the U.S., given how many variables are yet to be determined? And finally, WHO CARES about exchange rates, when ALL that matters is how many ITEMS OF REAL VALUE (PMs, food, energy, etc.) YOUR CURRENCY can purchase?
Thus, without further ado, excerpts from my May 20, 2011 RANT, “THE MYTH OF THE DOLLAR, AND THOSE THAT REFUSE TO ACKNOWLEDGE IT,” written with gold trading at $1,500/oz and silver at roughly $35/ounce…
The last of these three charts represents the U.S. “dollar index”, a trade-weighted index of currencies dominated by the equally sick Euro (63%) and yen (19%) currencies. In essence, when talking heads discuss “the dollar”, they are referring to this pitifully unrepresentative index, suggesting the dollar is “strong” any time its exchange rate with the Euro increases, with no regard to any other currency in the world. Or, more importantly, the dollar’s PURCHASING POWER.
Despite the fact that many commodities (including the suppressed PMs) have achieved new all-time highs and the American cost of living is skyrocketing, we STILL hear talking heads refer to “the dollar” in terms of this silly index, which has essentially no relevance to the purchasing power of Americans, and frankly little relevance to ANYONE aside from tourists.
Any time the dollar index blips up, government sympathizers crow how the “dollar is surging”; and thus, you must sell all commodities, particularly “inflation barometers” such as gold and silver. Of course, they never say BUY gold and silver when “the dollar” blips down, and geez, one of the moron Fed governors went on TV yesterday and said you should SHORT gold and silver here!.
The “surge” in the Dollar Index two weeks ago – from 72.5 to 75.5 – was a perfect example of how irrelevant this measure is, as the event that caused it was the head of the ECB announcing it WOULD NOT raise interest rates, instead choosing to keep them at 1% and continue printing money in the same reckless manner as the U.S.. Wow, is that bullish for the dollar or what!!! Quite a coincidence – by the way – that such “gold bearish” news also emerged on May 1st, just hours after the SUNDAY NIGHT PAPER SILVER MASSACRE – fueled by the fifth straight silver margin increase, BS bin Laden news, and the fact that the Chinese market was closed for a holiday. Followed, of course, by endless commentary about how gold fell due to the “strong dollar”, an argument which shouldn’t even work in a kangaroo court….with REAL KANGAROOS!
Oh, and by the way, below I have constructed a chart of the “dollar index” going back to the early 1970s, essentially from the time the gold standard was abandoned (including an accounting for pre-Euro currencies such as the Mark, Lira, and Franc). This chart is up to date, including this month’s “surge” from 72.5 to 75.5. Can anyone spot this “surge” in the long-term chart?
I, for one, cannot. LOL.
By the way, does anyone remember that little event in Japan during February, just TWO MONTHS AGO?
Oh yeah, now I remember, a major earthquake, THE WORST NATURAL DISASTER TO EVER HIT A DENSELY POPULATED REGION IN THE HISTORY OF MANKIND! I talk about this facetiously, not out of disrespect to the mourning Japanese people, but out of disgust for the pathetic American media and population, which as a group ignore things after a week or two of good headlines, in lieu of going back to their video games, reality shows, and texting.
I’m sorry to disappoint the perma-Pollyanas, but this event may be viewed, in historical annals, as THE event that finally brought down the dollar. Aside from the initial death and destruction of the tsunami – and the unfolding radiation catastrophe – the Japanese economy has completely collapsed, exemplified by the much worse-than-expected -5.2% GDP figure released yesterday, regarding the first quarter.
Japan is clearly in freefall, and its government is overtly ACCELERATING a 20-year money printing spree that puts the Fed to shame. But what’s really shocking, and as usual ignored by the intelligentsia in Washington, Wall Street, and the MSM (an oxymoron if I ever saw one), is the YEN IS RISING AGAINST THE DOLLAR! And not only that, but doing so despite an EMERGENCY G-7 MEETING LAST MONTH, in which the world’s largest Central Banks – led by Helicopter Ben – decided they would print as much yen as necessary to SUPPORT THE DOLLAR and WEAKEN THE YEN!
Think about how convoluted the situation, clearly FAR MORE RIDICULOUS than the dollar “surging” because the ECB decide to PRINT MORE MONEY. Japan, the world’s third largest economy and second largest manufacturer, completely implodes, and yet the Yen EXPLODES UPWARD and needs to be WEAKENED by a cabal of money-printing Western bankers. The reason for this, of course, is that the “yen carry trade” – the largest government-subsidized derivative operation in history – is unraveling, yet another example of just how deep a hole the Western bankers have dug for the rest of us.
My point is it’s MEANINGLESS to point to the “dollar index” as a measure of purchasing power – or frankly the dollar exchange rate against nearly ANY CURRENCY ON EARTH – given they are all fiat-based. Heck, many currencies, such as the Chinese Yuan, are actually PEGGED to the dollar, meaning that for every dollar printed by Bernanke, the People’s Bank of China needs to print a Yuan to prevent the Chinese currency from strengthening. You really can’t make this stuff up.
And by the way, the one thing that “economists” have gotten right, for what it’s worth, is the ORDER in which the various countries in the ECB are going belly-up. The EVIL, IMMORAL, and FRAUDULENT credit default swaps make that analysis easy for them, but either way, Greece in fact went first, followed by Ireland and Portugal. And as you can see by the daily news, despite all the rhetoric about how bailouts would help, the situation in each of those countries has rapidly deteriorated, to the point that it is now inevitable that these three countries will either abandon the Euro or be kicked out in the near-term (which would trigger explosive inflation in each of those countries, by the way).
And this week massive riots broke out in Spain, which is next up on the totem pole, and VASTLY larger than the other three PIGS. Spanish government bond yields rose sharply late this week before the potentially disastrous elections this weekend, prompting the Euro to have another sharp leg down (a “surging dollar”), and now the news (AFTER THE CLOSE Friday) that Italy, next up on the totem pole from Spain, had its credit rating outlook downgraded to NEGATIVE from STABLE by Standard & Poor’s.
So if the Euro tanks again on Monday (and the “Dollar Index” surges), do you think that American PURCHASING POWER will improve? And do you think any Europeans, particularly those in the huge nations of Spain and Italy, whom also could be facing hyperinflation, will be selling any gold?
Don’t make me laugh….or cry.
But the same clowns on Wall Street and in Washington and the media will, as always, tout the “strong dollar” to convince you the U.S. economy is “healthy” and gold should be sold. To tie in last week’s piece, many of the so-called “gold allies” will start writing about how gold cannot rise as a result of the “stronger dollar”- that is, the same people who continue to tell us that SHORT-TERM CHARTS of MANIPULATED MARKETS have value.
Finally, an apropos article on the topic by the indomitable Bill Holter, but before I go, consider this. If a nuclear bomb destroyed all of Europe – thus causing the “dollar index” to EXPLODE higher, what do you think would happen to gold prices?
Take your pick – Bill Holter
To all; the Dollar index (USDX) has rallied since last summer from the 72 level to the current 82 mark, roughly a 15% move. This, is the (one of) explanation as to why Gold has retraced 18% or so from its highs over $1,900. A couple of things stand out to me, first, after this run, there are now more “shorts” in the Euro (which means longs in the Dollar) than anytime since the index was invented. In other words, everyone is on one side of the boat betting on a Eurocalyptic event that destroys the Euro. Maybe, maybe not, what I think may be being missed here are the potentially disastrous events that could engulf the US. If I had to guess? Maybe JP Morgan’s derivatives book has blown up, which known or admitted to will take all of their counterparties to hell. Of course, JP Morgan will be saved but …at what cost? More Dollars, more liquidity, more dilution and thus “less value”.
Technically, the Dollar’s upside momentum is waning and looks like it could rollover at any time. Could a Greek exit (forced or by choice) actually be a positive and force the shorts to cover? Could this happen at the same time that a Dollar negative event (take your choice which one) hits the tape? Both occurring at the same time as oversold as the Euro is would be my bet. But …lower Dollar or higher Dollar, Gold mathematically will go higher as we turn the pages of our calendars. It has to. Has to? Yes, the Dollar, the Euro, Pound, Yen, Yuan, Rupee and Ruble (and all the rest) have been, are, and will be over issued to combat ongoing deflation of existing asset prices and debt. It is very simple, further dilution of paper is guaranteed…until TPTB are overwhelmed and have their hands forced into actually changing the monetary system.
My whole point here is this, I think it likely that the Dollar does not appreciate much further versus “other papers” but it really doesn’t matter. It doesn’t matter because ALL currencies will experience “leakage” meaning owners looking for a more stable and solid medium of savings will find it by exiting the current paper system. This is where Gold comes in to catch the bid of capital in search of safety no matter what or how loudly the main stream media tells you the opposite. Other than for the very very short term (in the case of margin calls and capital raising requirements), how can a Greek exit, a Spanish or Italian failure, a collapsing JP Morgan, a state of Illinois or California failure or global systemic bank runs (the latter which I believe HIGHLY likely) be negative for Gold and Silver? NONE of these events can in ANY way be bearish for real money, precious metals.
Were (when) any of these events to take place, there can only be 1 of two outcomes from the same policy response. We know that the central banks WILL PRINT in coordinated fashion, they will either be “successful” or they will fail. If they are successful in their efforts, more fiat money will be outstanding and the currencies will have been diluted and thus “worth less”. If they are not successful? Well, how valuable will Gold be if the entire banking system is closed where no one can get at their money and even if they could it would be valueless because the debt collateral backing the currencies had already imploded?
Please understand that the above are THE ONLY 2 outcomes if you use logic at even the 3rd grade level or higher. To tweak Richard Russell’s famous and long held phrase of “print or die”, I would rephrase it as “print or die…..OR print and die”. Take your pick because there is no other mathematically possible final outcome from here. Know and understand this concept and you will have all of the knowledge necessary to protect yourself and your family. Question it or don’t believe it at your own peril! Regards, Bill H.
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