Friday, May 22, 2009

A Golden Opportunity with a Silver Lining

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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In the current uncertain environment there are only three things that we know will take place - death, taxes, and that the U.S. Treasury will continue to flood the financial system with newly 'printed' money. While the first two are unabashedly negative, the third can be a golden opportunity with a silver lining. The ability to borrow the money needed to pay for the all the bailouts the government is engaging in never existed. The U.S. reliance on foreign sources to fund its operations was already stretched to the limit when the budget deficit was $400 billion, so printing money is the only way to fund the current year's budget deficit which is approaching $1750 billion. Even worse, news out of China indicates that the foreign money that the U.S. has previously tapped can no longer be relied on. In the last few days the markets seem to finally be grasping this situation with traders dumping U.S. government debt and the dollar and buying up gold and silver.

As long predicted in this blog, China has been selling its U.S. debt. It is not yet dumping it wholesale however (just wait, that day will come), but is rotating out of more risky to less risky paper. China sold a large amount of agency debt (Fannie Mae and Freddie Mac) and it looks like the U.S. Fed bought it. Certainly no one else in their right mind would have done so.If you go back and look at the Fed's first announcement on quantitative easing, you will see that one of the major purchases for the newly printed money was Fannie Mae and Freddie Mac bonds. China has also finally admitted it is worried about inflation in the U.S. and has been buying shorter term paper and avoiding longer term bonds.

The China news was of course negative for the U.S. dollar, but it is by no means the only thing pressuring the currency. A return to normal operating conditions for the global financial system (see comments on the TED Spread in yesterday's blog) is highly dollar negative The dollar has been kept up for the last many months because of its safe haven appeal and as conditions improve outside the U.S., particularly in developing economies, that appeal is waning rapidly. Foreign traders dump U.S. treasuries and repatriate their money under such circumstances. Indeed, long term treasuries broke above the key 3.25% resistance this week (when traders sell bonds the interest rate goes up) as the dollar has sold off against almost every currency. Overnight even the British pound had a major rally against the dollar. Talk about embarrassing!

The inevitable corollary of a falling dollar is rising gold and silver prices. Gold hit a two-month high yesterday, closing above 951. It is on the verge of a major breakout. Silver traded above major resistance at 14.50 during the day and it is only a matter of time before it closes above this key level. Figures released today show the demand for gold bars and coins was up 396% in the fourth quarter of 2008. The spectacular rise of 223% for gold purchases from ETFs seems small in comparison. None of this activity is taking place because Wall Street analysts and other mainstream 'experts' have been telling people to buy precious metals. And don't expect to be hearing about the opportunity from them either while there is still a lot of money to be made. They are usually the last to know about such things.

NEXT: North Korea, OPEC and Precious Metals

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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