Tuesday, September 22, 2009

Manipulation Fails, Gold Rallies Back

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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The old tricks of the authorities to game the gold market and support the U.S. dollar are no longer working. The IMF gold sale, used at least half a dozen times in the last two years, barely dented the price of gold yesterday and gold is rallying nicely this morning and trying to push above its high from last week. The U.S. dollar is dropping and is at 76.05 at the moment. If it drops below 76.00, it could fall all the way to 71.50 this fall. The inability of the dollar to rally during the Fed meeting this time is a sign of extreme weakness and an indication that the usual behind the scenes manipulation supporting the dollar is no longer working.

While the U.S. mass-media repeatedly publishes stories about there being no inflation, there can't be any inflation and even if there is inflation, it won't show up for years, gold is telling a different story. Just yesterday this quote could be found in the Wall Street Journal, "Still observers say many buyers believe inflation will remain low for years to come." The financial press is filled with similar remarks on a daily basis. Insiders don't believe this for moment, which is why gold is hitting record highs. These stories are meant to keep the public uninformed about what is really going on in the economy and financial system.

The source of inflation is the U.S. government's huge deficits and the need to continually print new money to cover them. This is constantly covered up by mainstream press reporting as well. Just this morning a story from a major online service about the huge bond auctions this week had the following quote, "Solid demand at auctions of different maturities this summer suggest today's two-year sale should be fairly well received." Media coverage has been filled with stories citing solid demand for U.S. treasuries in the last many months. Just where is this solid demand coming from?

In the second quarter, the U.S. Fed directly bought 48% of the new treasuries sold. It is quite likely that it 'influenced' the purchases of much of the rest. One mainstream financial paper stated U.S. households increased their holdings of treasuries by 2.5 times during 2009 so far (and this wasn't a comedy piece). The statistics that includes household holdings of treasuries also include hedge fund purchases however. Hedge funds are much more likely to have purchased massive amounts of treasuries, but somehow this logical conclusion couldn't be reached, perhaps because it would lead right back to the Fed. The large U.S. banks, all of whom have connections to the Fed, have also increased their purchases of treasuries significantly. There have also been reports from alternative Internet sources about how the Fed has been faking foreign purchases of treasuries by funneling them through off-shore money havens.

Whatever the actual percentage of new treasury purchases by the Fed is, and you can assume that it is well above 48%, it is all being done with printed money... lots of printed money. There has been no case in history of massive money printing by a government that didn't subsequently result in a lot of inflation. I have yet to see this mentioned in mainstream media coverage. It looks like the truth will soon be told by gold and the U.S. dollar. Gold is on the verge of a massive breakout and the U.S. dollar on the verge of a massive breakdown. The next few weeks could be quite interesting.

NEXT: Fed Decision Today; Dollar, Bonds and Gold

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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