“Fed passes China in Treasury holdings,” says The Financial Times. So, who’s the biggest holder of US debt? The Fed! And since the Fed doesn’t have any real money to speak of, how did it get all those US bonds? It simply created the money to buy them, out of thin air. In other words, the US didn’t really borrow the money at all. It just printed money. Isn’t that what Zimbabwe and Reichsbank did, and what Banana Republics do…just before they go bust? They can’t pay their expenses honestly, so they just print up some extra currency and hope nobody notices. But people do notice, eventually. And they dump the currency. Well, maybe this time it is different? But that hope is dashed. The Fed just keeps printing money. It has a mandate I remind you to buy $600 billion of US Treasury debt in the first half of this year.And surely that isn’t just noise, is it? No, it’s something important. Something we all need to pay attention to. It’s something that affects the value of every dollar we’ve ever managed to save. Maybe it’s why commodities are so high. And maybe it’s why the euro is back up to $1.38. And maybe it’s why the smart money is in buying gold .
Gold is what you buy when you fear the authorities are up to no good. But so far, very few people own gold. Ask your friends and neighbors. Many will have never considered buying gold…and they’ll look at you as though you were a kook for suggesting it.
In the average man’s mind – he trusts the government, because government is a good thing. It is there to ease his suffering…it will make sure that the rich don’t get too rich…and that he will have a retirement pension, public libraries, fire departments, and food tasters. If his car has a defect, he’ll count on the feds to make sure it gets called in and fixed too.…and his money? Despite the evidence of 100 years of Fed stewardship – in which the dollar lost 97% of its purchasing power – he still believes that the feds are on the case, and that they’ll make sure the US dollar is a valuable and reliable way to store wealth.
And if he’s wrong? Well, then the feds will turn out to be less reliable than he believes. And he’ll be out beaucoup dollars. The average man has a foggy view of the government…a bit of Mystic Knights of the Sea combined with the Rights of Man, Democracy, and supporting the home team. To say that he doesn’t think clearly about it is misstating the situation. He doesn’t think about it at all. And why should he? He has better things to do – like earning money and watching television.
Today’s modern governments have struck a bargain with the common man. They keep order, of course. But there is more to it than that. Keeping order doesn’t cost very much. And governments today, as Paul Krugman puts it, are “big, ambitious and expensive.” No gimmick will ultimately eliminate the currency crisis trade, but it buys the Fed some time with the public before they lose confidence in the central bank. A quote from Reuters: The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability…”Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible,” said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer.
And, recently, the Wall Street Journal Found a hedge fund that had liquidated a massive spread of contracts. These positions resulted in a net 100% loss to the hedge fund manager, and he just decided it was time to cut his losses. The selling appeared to panic jittery longs, cascading into more selling.
So is this the end of the great gold bull? I don’t think so.
Yesterday, the euro had the trap door sprung underneath it, while most of the other currencies traded in a tight range. At one point in the day, I looked up, and noticed that gold had turned around… I was excited that gold had just moved $20 in 10-minutes! WOW! I laughed, semi-seriously, that gold must have reached a low enough price to entice the Chinese to buy! I mean who else could buy enough gold to move the price that quickly and by that much? In the face of today’s economy, for those that experienced the risk assets that have prevailed the first two days of this past week, this has taken a breather, and that’s OK… Even after the worst January for precious metals in two decades, investors still have a $102 billion bet on higher prices, hoarding more gold than all but four central banks and more silver than the U.S. can mine in almost 12 years.
The five analysts ranked by Bloomberg as the most accurate over two years expect silver to rise as much as 23 percent before the end of 2011 and gold 20 percent, the median of their estimates show. UBS AG predicts the strongest industrial demand for silver since at least 1990 and the second-highest sales of exchange-traded gold products on record. Once written off as demand for photographic film waned, silver found new uses in everything from solar panels to plasma screens, making it the precious metal most used in industry. As stocks rose 9 percent and Treasuries returned 67 percent since the end of 2000, gold surged fivefold and silver sixfold.
“I had to chuckle when I saw reports that it was over for gold,” said Michael Cuggino, who helps manage $10 billion at Permanent Portfolio Funds in San Francisco, and has about 20 percent of his assets in gold. “Some investors have taken money off the table after a significant run-up in 2010. If you look at the macro environment, the instability around the world, the worldwide currency devaluation, these factors all bode well.”
Gold has had bigger monthly slumps four times in the last decade and plunged 34 percent from March to October 2008, before jumping 47 percent in the following four months. Silver posted larger monthly declines nine times over the same period and plummeted 57 percent over three months in 2008. It rallied 73 percent in the next four months.
Silver will climb as high as $36 an ounce this year, from $29.235 now, and gold will reach $1,620 an ounce, from $1,350, according to the Bloomberg survey of analysts. “Silver is the most undervalued metal and 2011 will be the year for it to shine” states Ron Fricke President of Regal Assets. “Investors of silver saw it grow as much as 50% in 2010 alone and the luster for silver has just begun”. “Gold is going quiet,” said Pete Sorrentino, who helps manage $13.8 billion at Huntington Asset Advisors in Cincinnati, Ohio. “It’s good and healthy and characteristic of gold’s stair-step rally.” “I don’t see any resolution to the debt crisis when the Fed is buying debt again and again,” said Thorsten Proettel, an analyst at Landesbank Baden-Wurttemberg in Stuttgart. “Most people will be loyal to their investments in gold and silver, because the fear doesn’t evaporate.”
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