"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Saturday, October 12, 2013

Velocity of Money Falling

The following chart is a bit dated as it only covers through the first quarter of this year but even at that, the trend is glaringly obvious - down!

Combine this with a CRB index or Goldman Sachs Commodity Index that cannot gain any upside traction, abysmal to miniscule job creation and of those, many are now part time jobs thanks to Obamacare, flat to relatively stagnant wages, and you can understand why, even without this chart, that the factors necessary to push prices sharply higher are currently missing.

I also would include something which is more anecdotal but which I feel is also a contributing factor to the deflationary pressures being exerted upon the US economy in general, namely, the fallout from Obamacare in the area of soaring health insurance for a large number of Americans. You have already or will have very soon, heard the horror stories as they continue to increase about health insurance premiums tripling for many Americans. In an environment in which wages are flat, that price increase comes right off the top of the consumers' disposable income. That means less money available for discretionary spending.

I believe this is what we are seeing reflected in this chart.

From the standpoint of gold, this helps explain why the metal keeps sinking lower. With the US Dollar not falling apart, the urgency to own the metal is subsiding among Western-based investors. That is evident from the continued drawdown in the reported gold holdings of the giant ETF, GLD.

Also, when one considers especially an artificially goosed US equity market working its way higher and higher throwing off ridiculous gains practically month after month, investment capital is going to need a compelling reason to be taken out of that sector and allocated into gold. Since gold pays no yield all investment gains from the metal must necessarily come from capital appreciation. In other words, if the price of gold does not keep rising, why own it when the Fed has created a perpetual motion machine in the form of US stocks?

This is why I keep coming back to the same point that I have been making - it is going to take something, some event, some occurrence, something, to break CONFIDENCE in the US Dollar or in the US monetary and political leaders for gold to respond upward in price.

 Most of you who read this site, and I myself believe that the US is on an unsustainable path which is going to end badly.  I believe over the long term, we will be proven correct but here is the current issue - as bad as the US is, does anyone believe that the UK, Japan, the Euro Zone, etc are really and truthfully any better? They have the same problem as we do, out of control spending at their national levels and gargantuan debt levels. There remains malinvestment in China which has its own set of problems while Brazil also has its issues to deal with.

The current monetary system, with the US Dollar as the Reserve currency is fatally wounded but what is there realistically to replace it at this point? Answer - nothing! At some point there will be but for now, the game continues. This is what allows the Federal Reserve to enlarge its balance sheet to obscene levels ( it is currently sitting near a mind-blowing $3.7 TRILLION and rising) without the Dollar imploding into Hades. It should come as no news to those who are informed that thanks to the Federal Reserve's shortsightedly stupid programs known as Quantitative Easing, the Fed is now the largest owner of US Treasury debt in the world. This is a Ponzi scheme, the likes of which the world has never seen and will never see again for it is one of near Cosmic Proportions.

Which brings me to another point -  no nation out there which is holding US Treasury obligations as part of their reserves wants to see the Dollar crash and the "value" of those reserves go up in smoke. Thus, no one rocks the boat other than some bilateral trade agreements here and there and noise about a new reserve currency. For all that noise and all those grumblings, the US Dollar is still enthroned as the king of the current monetary system.

This is why I go back to what I have been saying when it comes to gold - only if confidence is lost in the US Dollar will we see gold sentiment shift here in the West. I would watch the Dollar more closely than anything right now as a result. Interestingly enough or perversely enough if your mind thinks like mine, a rising interest rate environment would theoretically make US Treasury debt more attractive in the sense of better yields but this same rise in interest rates tends to crush any incipient forms of life in the US economy further aggravating its already out of control national debt ( less economic activity means lower tax revenues). If that were not bad enough in itself, it also makes servicing any interest payments of newly issued debt even more challenging for a country whose DEBT to GDP ratio is already over 100%. And yet, this rising interest rate environment is what had pulled the Dollar higher until recently.

In the long term this is why I believe gold will ultimately benefit but between the long term and the shorter term in which trading/investment decisions are made, there remains some formidable headwinds to the upward progress in the price of gold.

Trader Dan Interviewed at King World News Markets and Metals Wrap

Please click on the following link to listen in to my regular weekly audio interview with Eric King over at the KWN Markets and Metals Wrap.