Wednesday, November 11, 2009

Gold Rumbles as Dollar Crumbles

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

If the U.S. dollar chart was a person, it would be a stroke victim. The trade-weighted dollar has been falling since March and can't seem to rise for more than a few days before falling down again. The dollar's latest rally (triumphed by the American mainstream media) in the second half of October took it from 75 to just below 77 where it bounced down from its rapidly declining 50-day moving average. After a major gap down on Monday, instead of rallying strongly to fill the gap, the dollar remained comatose. It broke the 75 level decisively this morning trading as low as 74.77. This is another 18-month low. Comments by Fed officials on Tuesday led to the latest round of selling.

In contrast to the dollar chart, the gold chart looks like someone training for the Olympics. Gold hit another all time record high this morning. Spot gold traded as high as $1117.60 and spot silver as high as $17.71 so far. Technically speaking gold is in a textbook perfect breakout from a solid 18-month base, which is over 300 points deep. A technician would expect the rally to be at least the depth of the base. In a bullish market, double the depth is quite possible. Since the breakout took place at $1025, this would take gold to the $1300 or $1600 level. Gold is in a seasonally strong period until next March, so the rally should last until around then before a significant pause would be needed.

Gold is rising on the flood of liquidity that is being pumped into the global financial system. The same flood of liquidity is drowning the U.S. dollar. A number of Federal Reserve officials made comments Tuesday about U.S. employment likely continuing for a long time and the need for the Fed to maintain super low interest rates. In an eye popping comment, the Dallas Fed president acknowledged that the easy money was damaging the dollar, but he was unconcerned as long as the decline was orderly. So as long as the U.S dollar collapses slowly instead of suddenly, everything is fine. This is the wisdom from the people in charge folks.

The economic geniuses at the Fed are not worried about inflation, as is also the case across the pond in the other quantitative easing powerhouse, the Bank of England. There is no case in history where significant excess money creation didn't lead to inflation, but why be bothered by historical fact. How excessive the money creation is this time is indicated by a gauge kept by Morgan Stanley which measures the amount of cash circulating in the global economy as a percent of total economic activity. It is at a record high by far. Of course, you don't need complex money measures to determine if there is inflation. Gold has been the inflation thermometer throughout the ages and it indicates quite clearly that inflation is heating up.

Disclosure: Long gold, silver. No positions in the U.S. dollar.

NEXT: Action Speaks Louder than Words for U.S. Dollar

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.