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Gold’s weakness is related to the commodity trade at the
moment.
It is suffering from a combination of the weight of the
collapse in energy and metals (and other commodity) prices, a firm dollar
that won’t last, and the general absence of expected panic on the Greek
referendum - combined with the reality that gold also provides liquidity for
bankers and money managers who need it to shore up margins or buy more stock.
A couple of things to note on gold.
First: never buy gold on a crisis, especially if there is
any sign of its impending arrival. It is always better to buy the
mystery and sell the history in any market but this is especially true of
gold for many reasons that are likely obvious.
I’ve done work on this.
It is best to buy into the anticipation of the event.
Although, it also makes sense to buy the market once the
traders have sold their news.
The Crucial Factor for Gold/Silver: USD
The key to me is the US dollar. There is a lot of
confusion in currencies, and a lot of people are on the wrong side of the
dollar trade, I strongly believe. For one: the knee jerk reaction to
sell euros on the fears of Grexit is absolutely wrong.
Not only is the euro oversold going into this thing, but
even if the EU broke apart it would just be bullish for the euro.
All those businesses in the EZ aren’t going to turn to
dollars just because the union falls apart. There are norms that will
not change overnight just because the money is made of paper. Consider
this. If every country in the EU went its own way tomorrow and launched
their own currencies, which most of them would then just inflate (probably),
and the ECB was shut down, euros would be limited in supply and would
probably hold their value better than all the other fiat currencies being
floated against it.
I don’t know what would happen. That is a
speculation.
But I do not believe that the fate of the Euro and the
fate of the EU are the same thing.
Ludwig von Mises had this insight that may be relevant,
"The valuation of a monetary unit depends not on
the wealth of a country, but rather on the relationship between the quantity
of, and demand for, money. Thus, even the richest country can have a bad
currency and the poorest a good one" - On the Manipulation of Money
and Credit p. 21
If the ECB cracks open the spigot wider and wider that is
different. That may happen.
For now, however, what I do see that currency traders are
ignoring is that the US central bank is on its eighth year of ZIRP, and still
afraid to raise rates. The ECB’s policy is nowhere near as
unsound. None of the G7 banks have inflated like the Fed in the post
2008 environment. The Fed itself has inflated money at twice the pace
after 2008 as before.
It has created nearly $6 trillion dollars since the 2008
crisis, more than doubling the US money supply.
 
The 109% increase in money supply over this latest 8yr
period compares to a 69% increase in the last boom between 2001 and 2006, and
a 75% increase in the seventies. This is obviously the biggest bubble
the Fed has ever created.
These records should be no surprise in light of how far
down and for how long they have suppressed the rate of interest at, well,
nothing. Investors are simply lulled to sleep by the effects of the
policy on their portfolios. The ECB, by comparison, has expanded the
euro money supply by just 50% in the post 2008 period ( and euro M3 is up
only 22%).
The BOJ reports it has expanded yen supply by 20% (M0),
30% (M1), 25% (M2), or 20% for M3.
Yet almost every trader on earth believes the official
rhetoric and implication that the BOJ and the ECB has run a looser monetary
policy than the US banking system – now driven by an overall bank credit expansion.
Let me ask you this? If the BOJ really wanted to
persuade the world it was inflating wouldn’t it have updated its numbers by
now? Why is it telling us it is inflating money but reporting money
aggregates that are not growing very much at all.
The political noise and verbal rhetoric is distracting
traders from the facts and economic law, and I see this as a big
blunder. The USD is the biggest accident yet to happen, imho.
As soon as you see confirmation of that FACT in the tape
run for the hills… or for more gold!
Courtesy of www.dollarvigilante.com
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