We have now had a $50 pullback in gold prices since last Thursday, this amongst daily news of war or no war with Syria. Yes we were somewhat overbought and due for some correction but the timing and depth is somewhat suspect in my mind. I do want to mention before I go any further that every crash in every market in all of history has come from an “oversold” market. In my opinion, news of the dollar being terminated as the reserve currency or a “markup of gold and a reset of asset pricing” will almost assuredly come from an “overbought” market. Also it is important to understand that markets can remain oversold or overbought for a very long time depending on the fundamentals and how strong they are that are pushing the move.
That said it is interesting to see gold “react” downward in the face of the current economic and political background. The G-20 meeting in Russia began today with Pres. Obama refusing to meet with Mr. Putin and Secretary of State Kerry not even attending. What is the possible upside to this kind of diplomacy? Especially when Congress is in the process of debating and voting on attacking one of Russia’s favorite sons. Putin’s response to John Kerry’s Congressional testimony was not diplomatic in any fashion when he directly and bluntly said, “John Kerry is a liar.” The timing of this year’s G-20 meeting could not be worse for the U.S. and our approach of basically not attending is a gross miscalculation in my opinion.
I also would like to point out that our 10 year Treasury bond is only 1 tick away from the round number of 3%, currently at 2.99%. The buyers are gone and you can bet that China (and Japan) are selling methodically. Even though China has refrained from “rhetoric” regarding Syria, they have warned publicly that a war with Syria “will be very bad economically and financially for the entire world.” As loud as President Putin has been, China has remained “stoic.” It is almost as if China is the “Don” and Russia in “Luca Brazzi” style is the muscle. I have said before and will say again, if we fire on Syria it is a good bet that China will dump Treasury bonds on the market with the express PURPOSE of making our interest rates explode higher.
Russia and China are only 2 of the G-20, when you take out the G-7 you are left with 11 other nations. Over the last years and last 5 in particular, inflation has exploded globally and these other 11 nations have felt it directly. This inflation was “exported” by the U.S. with each QE printing…these nation know this. They know that it is in their best interest to no longer be forced to settle trade in dollars. I think it is a good bet that some sort of deal or communique comes out after the G-20 is finished that will act as a “roadmap” to the world lessening their reliance on the dollar.
As I mentioned above at the beginning of this article, the “timing” of gold’s downward reaction though not entirely surprising from a technical standpoint is highly suspect from a geopolitical standpoint. In the spirit of portraying “all is well,” it is quite convenient to the U.S. to have the price of gold drop into and during the G-20 summit. “Gold down and dollar firm” can and will be pointed at as “stability” and thus a reason not to supplant the dollar.
I would say “good luck” with this because the rest of the world knows how tight the gold market is. They can see it and feel it first-hand. They have seen it with their own eyes while trying to buy in size. This was confirmed when Germany was rebuked over their 320 tons when they were told “don’t worry…we’ll get it to you…over the next 7 years” as if we had to go out and mine it? I know that I have spent quite a bit of time writing this week and last regarding Syria, I believe it to potentially be THE largest geopolitical event in the last 70 years. It is potentially the biggest miscalculation ever made by the United States…ever! Even though the public barely even acknowledges the litany of scandals from the NSA, IRS, Benghazi etc., they will not be able to ignore Syria if and when the first shots are fired if it spreads as I believe it will.
The potential for this to become the 3rd and final world war is huge. Hardware and troops are being shuffled around and hopefully will only be “posturing” but Congress will have the final say (unless they vote no and Obama stands by his words “I don’t need Congress”). This is not like TARP or Obamacare where they had less than 24 hours to read the legislation before a vote, this is an issue where they can sit down and THINK through the ramifications. This however IS exactly like those two where the public howled for a no vote. Reports of calls into Congress are running 100-1 against a war. The only poll that I’ve seen was better than 10-1 against. Will it matter what the people want? I certainly hope so but fear that it won’t. The system is bust and something needs to be “blamed.” You can tell me what you’d like but an attack on Syria, especially for the reasons given doesn’t smell right to me. With a broken financial system, this is in my opinion a last ditch effort to reflate and cover up insolvency… and if it doesn’t work? I would liken it to “kicking the table over” after losing the game. The only problem is that this is not a game and the stakes have never been higher.
No matter what the depth of gold’s pullback is, you did not buy it to protect you from a world war (though it will have utility if this is the case). You bought gold in the first place because economic and monetary policy is and has been pure folly for years. If shots are not fired and the paper pushers can get gold down another $100 or $200 it doesn’t matter, the complete insolvency of our financial system will still be there every time the Sun rises until some sort of change and reset is effected…which is WHY you own gold.