Mike McGill Trading Operations
The first month of 2012 has been a great one for the precious metals markets. Gold bullion prices saw their biggest calendar gain this century – just shy of 14% above the December 2011 close. Silver bullion prices enjoyed a 21% boost since the beginning of January.
The forecast for gold and silver looks extremely promising for this coming spring, and for that matter, the rest of the year. There has been a convergence of fundamental forces and a litany of breaking news stories that are extremely bullish for all precious metals. A brief examination of the events and factors now driving this recent upsurge are outlined below.
Federal Reserve to Continue its 0% Interest Policy
The Federal Reserve’s January Open Market Committee announcement that it intends to keep interest rates at essentially 0% through the end of 2014, drove the spot price of gold up over $40 in three hours. The Fed is setting the tone for cheap money and negative interest rates (far below the real cost of inflation) for the foreseeable future. Cheap interest rates equate to cheap currency valuations and cheap currency valuations mean that all commodities, including gold and silver, must accordingly be priced higher.
The fact that the Fed has taken the unprecedented step of announcing its interest intentions three years out, versus the normal quarterly and, at best, yearly declaration, can only mean that it knows the US and world economies are on extremely shaky ground. The trillions of risky sovereign debt run up by Europe, the United States, and the rest of the G20 countries, can never be satisfied let alone extinguished. The only hope is to keep rates so low that sovereign nations can continue to refinance their ever-burgeoning deficits at extremely low rates. This will allow them to survive, maybe, a couple of more years before they implode under the sheer weight of the unconscionable debt which they have run up.
2011 US Dollar Surge Coming to an End
The US dollar index, which charts the floating US dollar value against the euro currency and five other major world currencies, has appeared to top out just short of the 82 range. Having failed to break this resistance, it has sold off two and half basis points in January. A weakening US dollar is positive for the precious metals in two ways. The first is that a weakening US dollar signifies the need for more central bank assistance which inherently means more loose credit, more money printing, and more outright debt monetization (purchase of US bonds by the Fed to keep the US debt $16 trillion Ponzi scheme alive). Of course, all of this new additional financial stimulus is definitely inflationary and nothing responds to inflationary measures better than precious metals – nothing.
The second reason that is just finally being understood by the novice investment public, is that gold and silver are competing currencies against government issued fiat paper ones. As the US dollar, being the world reserve currency, begins to show weakness, gold and silver rise accordingly, in real terms and in the sentiments of the investing public.
A Breakdown in the US Dollar as the World Reserve Currency
Since the end of World War II and the Bretton Woods Agreement, the United States dollar has enjoyed the status as the world reserve currency. The dominance of the US dollar as the arbiter of world economic value was enhanced even more by two events that occurred at the beginning of the 1970s. The first was President Richard Nixon’s unilateral declaration in 1971 that removed the United States dollar from the gold standard. No longer would the US be willing to honor its debts with shipments of gold bullion but would instead, from then on, pay its obligations with US denominated treasury bonds only.
From this point forward, the US, being by far the largest economy in the world, has literally flooded the planet with trillions of US dollars; so much so, that the dollar has become, by default, the benchmark common denominator for most all world financial transactions.
The second event was Uncle Sam’s successful strategy to persuade (more precisely, coerce) all the OPEC nations to sell their oil in exchange for US denominated treasury notes and bonds. This allowed the United States to pay for its energy needs on credit. Any annual deficits caused by rising oil prices or increasing domestic expenses, were simply paid for by the US Treasury (with the collusion of the Federal Reserve) issuing IOUs in hundreds of billions of dollars to the respective oil producing nations. Any nation that didn’t like this relationship received a friendly reminder from the State Department that a very convenient revolution could easily be orchestrated within that country and a new government quickly installed, which more than willing to accept US debt for oil.
This is exactly what happened in Iraq and, more recently, Libya, when their respective leaders, Saddam Hussein and Muammar Qaddafi, began requesting other forms of payment for the oil produced by their countries, namely eurodollars and/or some form of gold denominated assets.
The US dollar’s hegemony is about to change, and quickly! A little over a week ago, India announced that it was going to begin paying directly for oil and natural gas shipments from Iran in gold bullion, thus bypassing the US petro dollar trade entirely.
Meanwhile, in the last few months, many other countries have announced that they have commenced commercial agreements whereby they intend to facilitate trade amongst themselves conducted in their national currencies and/or gold, avoiding the need for the US dollar in their transactions. A list of these countries includes China, Russia, Venezuela, Brazil, Japan, and Iran, with certainly more to follow (for an excellent overview, see “The US Dollar Paper Tiger” by Jim Willie and “China, Japan Bypass US Dollar in Pivotal Trade Agreement” by Julian Phillips).
CONCLUSION
The writing is on the wall. The US dollar is quickly losing its privileged status as the world reserve currency. More and more, intelligent nations of the world are declining to accept US debt IOUs for their exports. As the US dollar begins to decline in its acceptance for foreign trade, its purchasing value will erode as well. US citizens will see prices for all goods and services, especially imports, soar as their home currency is recognized as the counterfeit fiat currency that it is. The recent announcements by some of the world’s top industrial powers to abandon the US dollar can only have a profound positive influence on the prices of gold and silver.
To learn more about the rewards of precious metals investing, including how to fund your existing retirement account with gold and silver, call Kristos Trading seven days a week at 888.385.1116. To learn about the very best referral program in the precious metals industry, please visit the Kristos Trading Referral Program.
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