In what can only be called a dramatic change of direction, the upward move of
the Chinese yuan has caught a lot of investors off guard, as their attention, in
the currency market has mostly been on the Japanese yen, once it implemented a
policy to drive down its value.
Meanwhile, the yuan has moved strongly in the opposite direction,
strengthening against the U.S. dollar in a meaningful way since the beginning of
2013.
More on strength of yuan
Saturday, May 11, 2013
Tuesday, May 7, 2013
Discipline in Preparing for the Dips
Listening to the media coverage of the annual Berkshire Hathaway (BRK.A) meeting or party, it reminded me of a huge part of a successful investment strategy, which is a key to really making good money in the market. It's not the accurate dissection of data of a specific company, although that is important; neither is it the identification of a firm that has a solid, competitive moat in place that guarantees long-term growth. That is also vital to investment success, but it's all secondary to what we're going to talk about in this article.
Continue reading on how to prepare for investment deals of a lifetime
Continue reading on how to prepare for investment deals of a lifetime
Hidden Secret of Uranium Success Going Forward
It is imperative when looking at specific sectors like uranium, which can move in and out of favor quickly because of temporary setbacks, to take a deep breath and contemplate whether or not negative conditions are temporary or truly detrimental to an industry over the long term.
That's the case with nuclear power and uranium, which have suffered bad press from the unfortunate accident in Fukushima, putting the sector in a temporary tailspin.
See this explosive revelation of Uranium's "Dirty Little Secret."
That's the case with nuclear power and uranium, which have suffered bad press from the unfortunate accident in Fukushima, putting the sector in a temporary tailspin.
See this explosive revelation of Uranium's "Dirty Little Secret."
Silver's Performance in a Weak Economy
Silver in general is standing at a very interesting position, as it's poised to break out in the short term, while at the same time a weakening economy will play havoc with the precious metal over time.
We'll look at some myths surrounding silver in this article, as well as some of the realities inherent in silver as an investment option.
See how silver will perform during economic weakness.
We'll look at some myths surrounding silver in this article, as well as some of the realities inherent in silver as an investment option.
See how silver will perform during economic weakness.
Natural Gas and State Renewal Energy Requirements
At least 16 states are looking to reduce the amount of power generated from solar and wind because of the high costs of the renewable energy and the abundance of natural gas in the United States. A number of energy companies with significant exposure to natural gas could be huge winners if this is what unfolds.
See at Seeking Alpha why this could dramatically effect share price of companies with large natural gas exposure.
See at Seeking Alpha why this could dramatically effect share price of companies with large natural gas exposure.
HudBay Minerals Will Prove Shorts Wrong
HudBay Minerals Inc. (HBM) appears to be at a very good entry point, as for no justifiable reason, shorts have been pouring it on HudBay, even though it is well-financed and recently communicated it has more measured, indicated, and inferred mineral reserves at its Constancia mine than originally believed.
Continue reading on Seeking Alpha
Continue reading on Seeking Alpha
Turquoise Hill Resources Ready to Rumble
On November 17, 2008, the share price of Turquoise Hill Resources (TRQ), then known as Ivanhoe Mines, plummeted to $1.72 a share, dropping from the $11.12 share price it had reached on August 25 of the same year. Not too long afterwards, as news of the resources at its Oyu Tolgoi mine in Mongolia became known, the share price gained momentum, soaring to a high of $28.55 on February 28, 2011.
continue reading on Seeking Alpha to see what should drive the share price of the miner up.
continue reading on Seeking Alpha to see what should drive the share price of the miner up.
The American Economy Is Recovering, It Really, Really Is - Wink Wink
It's incredible to me to see the financial media portray the American economy as one that is in a sustainable recovery. Data and facts are selectively reported and manipulated to present the strongest economy possible without media being considered nonsensical.
I don't mean by that there isn't any reporting of the negative economic facts, as the mainstream media wouldn't even be taken half seriously if they weren't. Yet in the majority of cases there are omissions concerning the analysis of the data. For example, with the recent unemployment numbers, where what was highlighted was the drop in the number of unemployed, but not why that was a disaster rather than a positive outcome.
The over emphasis of one element of the economic data, while minimizing another, is the game being played in the financial media now, one all investors must recognize in order to protect their capital.
Politics, Media and the Economy
What must be acknowledged and understood is the media in general have migrated their political way of reporting into the financial realm. That means because there are certain things networks, reporters and writers believe, they allow that to dictate how they present the news and data, and how it is written, to bolster their own political outlook and beliefs.
I don't care, but I'll get a few of you riled up here: this is especially true with liberals. The point isn't politics though in this article, and whether you're a liberal or not, it must be understood that politics has mixed in thoroughly with the economic and financial, and it's difficult to extricate them when looking for actionable data and news from media outlets.
For example, if you have liberal political leanings, it isn't the purpose of this article to point to the political side of it, but to help you to understand when media you would agree with when talking politics transfer their focus to economics and business, you have to be careful not to drink in the reporting in a way you would when engaging with a political campaign. Most people recognize all the hoopla and exaggerations of politicians and their aides, but it's not as identifiable when the writing or reporting migrates to business. This is especially true concerning the condition of the American and global economy, which reflects directly on a President and the party in power.
No matter what your political persuasion, be careful of financial reporting, especially in relationship to the economy. You also have to careful in regard to certain sectors that are political magnets, such as energy.
Agreeing with the world view of a writer, reporter or news outlet is completely different than looking objectively at the hard data.
Quick Example
Just to give you an idea how financial data can be reported as better than expected, here's how the recent data concerning the devastating drop in durable good orders was presented.
The decline in orders is the latest in a string of reports that suggest the manufacturing sector cooled off a bit toward the end of the first quarter - along with the broader economy.
As is often the case, a large swing in monthly orders for large and expensive commercial aircraft exaggerated the headline number on durable goods.
Notice how the huge 5.7 percent drop in durable goods was presented as this: "the manufacturing sector cooled off a bit." Below that the drop in monthly orders in commercial aircraft "exaggerates" the numbers associated with durable goods. This is irresponsible reporting at best, yet most people don't even see the subtle way the data is skewed to look far less ominous than it is.
Throughout the article most data are minimized, until finally near the end the revelation durable goods orders are revealed to be significantly downwardly revised for February, being lowered for a gain of 5.6 percent to a lower gain of 4.3 percent. That is a big difference, yet it's reported with no commentary and a noticeably absent shrug.
Unemployment Numbers and the Economy
Now let's look at the latest unemployment numbers. The U.S. Bureau of Labor Statistics reported the economy added 165,000 jobs in the prior month, while the unemployment rate fall 0.1 percent to 7.5 percent. That means the U.S. economy is chugging along nicely right? Wrong.
• barely keeps up with population;
• features mostly temp workers;
• leaves out prime-age males and all young workers;
• and keeps labor participation rate at a low level from 1979.
The temp workers are the most interesting to me. [It's a direct result of Obamacare,] whereby companies are protecting themselves by starting to hire temporary or part-time workers.
Consequently, a number of workers then go out and get a second job, giving the appearance there is more participation in the workplace than there really is, as well as more hiring being done than is the reality, as far as new workers entering the work force goes.
All of this must be properly identified and assessed by investors looking for data that give them as realistic as a look at what is really happening.
When all is said and done concerning jobs numbers, they are still all estimates, even when there are revisions to original data.
Besides all that, a big portion of the lower unemployment numbers come from those simply leaving the job market altogether; they're no longer looking for a job. At this point in time lower unemployment data are an irrelevant metric for investors and the health of the economy. That will remain that way until meaningful, full-time jobs are created.
Durable Goods Orders
The importance of durable goods data are they reflect how far beyond core staples Americans are acquiring. Lower durable goods orders mean they consumers are spending primarily based upon needs and not wants. It's not a sign of economic growth by any stretch of the imagination.
It also implies the lack of willingness of people to commit to long-term purchases of more expensive items. These include furniture, appliances, and heavy machinery, among many other products.
Two segments in durable goods orders that improved were orders for communications equipment and computers. Autos and auto parts saw a slight increase in orders, but that was only 0.2 percent, the lowest orders so far in 2013.
While not the pervue of this article, the boost in tech-related orders confirms my outlook for the big tech companies, which is they are about to soar.
Overall though, the drop in durable goods orders points to a cautious outlook, one that doesn't strengthen the idea we're in any type of real and sustainable recovery.
Orders for durable goods fell 5.7 percent.
Company Earnings
Another key factor in assessing the real condition of the American economy is what the earnings results really represent for publicly traded companies. While earnings are being touted in many cases during this earnings season, the reality is the majority of those earnings are from cutting costs rather than growth.
Companies are cutting to maintain an appearance of health, while they wait and hope for the economy to experience real growth.
If the economy doesn't pick up this will be exposed, as there isn't that much more companies can do to lower costs, as many have cut as close to the bone as they can.
Other than the occasional exception, the earnings of companies aren't something that can be relied upon, other than pointing to management doing what it can in a very weak economy to generate earnings.
The Federal Reserve has the Pedal to the Metal
If the economy were really doing that well, there would of course be no need for the Federal Reserve to continue to create money out of thin air. The fact that it has no intention of stopping stimulus measures points to the reality that the economy can't stand on its own, and when you look at the results of the stimulus, can't grow either.
What's disconcerting there is the Fed and Ben Bernanke continue to do the same thing with no positive results. What they need to do is take a step back and look deeper into the causes of no real growth after the creation of trillions of dollars.
One of the more obvious problems is banks aren't spending the created money, they're hoarding it while also using it to shore up their balance sheets. It's not reaching consumers or others wanting access to the capital.
All the money provides cover and the illusion of recovery, but if trillions do little or nothing to help, how can the creation of more money bring about different results?
Just picture banks and the government digging a pair of holes together using shovels. They both dig a hole, and then each throws the dirt they shoveled into the hole the other dug. That's the basic story of banks and the Fed at this time. It's simply done over and over again with the end result always the same. Maybe that's those shovel-ready jobs the administration has been talking about.
Money Velocity
One metric few investors consider or know about is that of money velocity. What this represents is the pace at which money is spent. This is one of the numerous things Keynesian money creation has no control over. Only those borrowing and spending have power to determine this, and it's totally related to the choices of those with capital at their disposal.
As inflation has dropped over the last 3 decades, so also has the velocity as which people spend money. This is a major factor in real economic growth, one that stimulus supporters don't want the average person to know about or consider. Those of us wanting to understand the health of the economy need to know this.
Lower Interest Rates
From all of this you may think I'm about to go into bearish mode for equities, but I'm not. The reason is there is another key element in the economic and investing picture, and that is low interest rates.
What that has done has pressured many investors out of what would have been considered safe cash investments, and moved them into equities. That's why there has been such a strong move in blue chip stocks with a good dividend record over the last year or so. Unless money is allowed to sit and do nothing in an extremely low-interest account or investment, it must be put to use somewhere. Over the last 12 months that has been blue chip stocks.
Those include Proctor & Gamble (PG), Kraft Foods Inc. (KRFT), 3M Company (MMM) and Merck & Co. (MRK), among many others.
Performances of the stocks over the last year are shown below.
3M
Kraft
(click to enlarge)
Merck
(click to enlarge)
Proctor & Gamble
(click to enlarge)
The reason for showing these is to confirm people have been investing in blue chip stocks over the last year or so in lieu of placing money in banks, CDs, money market funds, and other non-producing financial instruments.
Obviously not everyone is doing this, but a large portion are, which has been the major impetus behind the climb in blue chips during a weak economy. It appears that blue chip period is starting to wane, with a new focus on big tech stocks emerging as the investment of choice.
All of this is to say it's the consequence of low interest rates, which have forced a lot of money into equities that wouldn't have otherwise been there.
During the next couple of years we'll probably see money travel about to different sectors of the market until those particular sectors exhaust themselves. At that time capital will find a new home. Also during this time it looks like each step will include a little more risk tolerance, which is why the recent upward tick in large tech stocks appears to be the next place investors will park their money.
Some big tech stocks moving up since the middle of April include Apple (AAPL), salesforce.com, inc (CRM), Microsoft (MSFT) and IBM (IBM). I would look for low forward price-to-earnings ratios and good entry points. Since it looks like this sector is about to take off, entry points look good right now.
No matter how much money the Federal Reserve or other central banks print, it's only if the money is spent which will determine the economic effect. That means the Fed really has limited power, and only the low interest rates have resulted in investors pouring money into equities, creating the illusion of prosperity and confidence.
The truth is consumer confidence is anemic, and that is evidenced by the hard data of the drop in durable good orders, which points to the fact consumers are also hoarding their money, using it for necessities of life rather than higher-priced items.
Conclusion
This article wasn't meant to be an exhaustive look at the American economy, but enough to show there are forces at work to make it look stronger than it really is. That includes media reports, skewed government data, a lack of understanding of effects of the Federal Reserve, and how low interest rates are driving the investment of capital.
What kind of recovery doesn't create jobs, has one of the slowest rates of growth in modern history, includes falling incomes, and includes little small business creation?
The reason for all of this is the Federal Reserve refused to allow the economy to take its natural course and cleanse itself out, which would have resulted in a more healthy economy going forward. Instead Bernanke and others got a messianic complex and decided we just shouldn't be allowed to experience the normal process of some temporary economic pain. That has produced where we are today, and the practices continue on. It's not going to end well when it all collapses.
What will happen in the short term (next couple of years) is what's relevant to investors. Money always finds a place to work, and the low interest rate environment, which will continue on for some time, is pushing people to put their money in investment vehicles they normally wouldn't have.
We need to watch the trends as they unfold, with the blue chip stock trend starting to wind down and the large tech stock trend starting to unfold. Once the tech stock trend slows down, money will look for another place to land. That probably won't be for another year or so, assuming the tech trend lasts as long as the blue chip trend did.
That's not to say some blue chips won't continue to climb, as some appear to be. But a number of them have reversed direction over the last couple of weeks right at the time the large tech stocks have started to rise. That suggest the money has been taken out of a lot of blue chips and reallocated to big tech. The trend has started, and I don't think this current cycle of investing is going to stop for some time. Money is simply going to migrate from sector to sector as risk tolerance increases. I think that gives a hint as to where money will go after the tech trend is over.
If this is the scenario, why be concerned about the American economy then? The reason is it is still being propped up by smoke and mirrors, and has very little foundational strength behind it. We must understand that even as we continue to stay in the market.
It also means the scenario can change very quickly when a central bank is printing money like it is today. We are in uncharted territory, and when most data point to fearful consumers and weak job numbers, we need to admit the economy is like a big house we built using a deck of cards. An unexpected wind could easily blow it all down.
When reading news stories and reports, we have to, more than ever, read and digest the terminology used and hard data reported. The hard data needs to be what we pay attention to, not the words used to manipulate that data in our minds. We shouldn't look for false comforters, but those presenting the best facts available so we can make informed decisions, whether the data are scary, negative or positive. In times like these we need reality more than ever.
The American economy is extremely fragile, and still years away from any meaningful, sustainable recovery. That must be part of our mindset when we make any investment decision during this season of time.
Wednesday, April 10, 2013
Gold And Silver Prices In The Midst Of A Currency War
Since almost everything is perfectly aligned to produce rising gold and silver prices, many investors are baffled and frustrated over not only the lack of upward movement in the two precious metals, but the plunge in price for both of them.
Most mainstream media outlets point to the alleged recovery in the United States as a major reason, but that's in reality not even part of the equation. The reason a recovery is cited as important for gold and silver prices is the assumption the Federal Reserve will stop its easing program sooner than expected.
While there are all sorts of assertions of recovery thrown around in the financial media, most institutional and private investors know the difference, even if the general population doesn't. A so-called recovery isn't even part of the picture, and shouldn't be seriously considered in relationship to the prices of gold or silver.
The exception to that would be the industrial demand for silver which would result in higher silver prices. But there has to be an actual strong recovery for that to be considered in the price equation. Some may ask about the recently released job figures, which appear to confirm robust economic growth in the United States.
But the data aren't even close to being significant, as evidenced by the fact the participation rate of the labor force has plummeted to 63.5 percent; the lowest level since 1981. That is a big contributor to the 7.7 percent unemployment rate released. That and the quality of jobs and suspicions many of those getting jobs were actually obtaining second jobs because of the requirements surrounding Obamacare, which make the job numbers very dubious.
Another factor is the number of people no longer being counted in the labor force have jumped by almost 300,000 in January, which is larger than the alleged number of jobs created. Consequently, we must look past the headlines to see the actual data.
For example, a significant 48,000 of the jobs created were in the construction industry, which were the result of the $40 billion in monthly acquisitions of mortgage backed securities by the Federal Reserve.
Some may think that it means stimulus is working, but on the contrary, it means the jobs are being artificially created and propped up, and when the Fed stops pumping money into the economy and/or begins to unwind it's positions, the economic house of cards will collapse around them. Rising interest rates will result in similar consequences. On the other hand, only 14,000 of the jobs added in January were in manufacturing, which would have pointed to a sustainable growth pattern if the numbers were higher. So the economic picture remains grim, and the U.S. economy continues to falter and struggle.
Fed Strategy
For those that don't understand the monetary policy of the Federal Reserve, it is probably thought the latest job-creation numbers point to wild success for the central bank. It's actually the opposite because the overall stated purpose of quantitative easing is failing at this time, which is to debase the U.S. dollar. What that means is the Fed will continue to print money indefinitely, and could even ramp up the printing presses more ... and probably will. The Federal Reserve wants a weaker, not a stronger dollar. We'll get into the why of that a little further into the article.
Fed minutes
Before we go on, there is a need to point out the latest minutes from the Federal Reserve which supposedly pointed to internal disagreement about the loose-money policies it is now engaged in. A large number of investors actually ate this up, thinking the Fed was indecisive over whether or not it was going to continue on with its stimulus program over the long haul. It was undoubtedly a ruse.
The Fed has absolutely no intention of ending quantitative easing any time soon. The comments in the Fed minutes were obviously orchestrated to create a sense of uncertainty around its practices and outlook. The question is why did they want that to be layered on the public investment psyche? This is important because it seems to contradict the goal of debasing the U.S. dollar even further.
I don't think it's anything more than creating some doubt in the minds of those who believed they had the moves of the Fed figured out. Almost no one has been uncertain as to what the Fed would do lately, and so that allows for a number of investors to position themselves for huge gains. That includes other countries as well. So to generate some confusion in the minds of people was the goal there, and it has of course worked, as the idea of an ongoing recovery has been successfully planted in the minds of investors. Now many think sometime soon the Fed could end its stimulus, even though by its own unemployment parameters it's far from its stated goal.
Why the Federal Reserve Failed to Weaken U.S. Dollar
Okay. The Fed failed to lower the value of the U.S. dollar. The reason is that we are in the midst of a currency war, even though it is asserted that isn't the case. And don't be confused by the origin of the war: it's the Federal Reserve and its lengthy loose money policy that kicked it all off. The reason the dollar isn't falling in value is because the central banks of other nations have responded with their own stimulation efforts; the most recent and important being Japan.
Nothing but a currency war, or aggressive response to the policies of the Federal Reserve could have kept the price of the U.S. dollar from falling. The fact that the dollar is perceived to be so strong confirms the fact there is a currency war going on. Nothing else can account for the strength of the dollar at this time. Since it may not be obvious to a lot of readers, I include the practice of people and institutions throwing their money into U.S. dollars when they panic, which seems to be very regular these days.
Weaker competing currencies are creating the illusion of a strong and safe dollar, which is then artificially reinforced by investors pouring their money into it. This is why I tie the currency war and illusion of safety in the U.S. dollar together. They're inseparable, and so must be tied together when talking of currency movements. The perceived flight to safety is a major reason the dollar retains some of the strength it has.
Central Banks and Currency Wars
A currency war is when central banks representing different nations participating in the printing of money out of thin air. This is of course sounds like stimulus in general. The difference between that and a currency war is the degree and response of central banks to the Fed. In this case Japan has boosted its stimulus enormously, and so the yen has moved lower against the dollar.
While we have no idea when it will change, the outcome of all of this for the U.S. dollar is it will probably continue to remain strong for a season, and so the Federal Reserve will continue to print or respond to competing stimulus efforts in order to bring the value of the dollar down. Eventually it will cause investors to lose faith in the dollar, which at that time will experience an enormous plunge in value in a relatively short time (not instantaneously).
All of this is predicated on the fact the Fed wants a weaker U.S. dollar. The only way to get it is to continue printing money. The outcome of that is obvious, and only a matter of when, not if it happens.
Currency Wars are Predictable
What's interesting about currency wars is there are recent historical data which can be used to learn how the currencies respond. While a currency war is cyclical in regard to different currencies, they are linear in nature, which means they are predictable and easily identifiable. Already noted is the predictability of the response of the Federal Reserve to competing central banks in regard to its policy of debasing the dollar.
The next stage is to see which currencies will be affected and how by that battle. Over the last couple of years we can easily see how the battle of currencies played out with the dollar, the euro, and now the yen. This is where gold now comes into the picture. To see the movement of the value of currencies, it must be measured against gold in relationship to a specific currency. In the case of the U.S. dollar, it reached a top in September 2011.
About a year later the same happened in regard to euro gold. Now we have yen gold approaching history highs. The pattern is easy to see, and as mentioned - predictable. The metric is simply the price of gold reflected in the currency in question. So currencies move in a predictable manner as they devalue in relationship to gold.
After the yen the British pound will probably be next in line to move in the same manner. When the cycle comes back to the U.S. dollar, it is at that time the projections of much higher gold and silver prices will kick in.
Understanding Gold Prices and Currencies
Many investors don't have an understanding of what is happening with gold when talking of its price, so let's look quickly at what it really means. When talking about the price of gold and whether the movement is up or down, in reality what is being talked about is the strength or weakness of a currency that is being determined.
Gold itself is inert and actually stays neutral as a store of value. The price of gold moves in direct correlation to the strength or weakness of currencies. Again, this is why major currencies in a currency war can be identified fairly accurately as to their strength in relationship to gold. Just keep in mind it's the currency that is actually being measured against gold, not the value of gold in and of itself that is going up or down on its own.
Gold and Fed Minutes
Let's revisit the Fed minutes again. Why did the Fed have the comments about its policy in them? It wants to keep investors off balance. That is important because it is in order to be able to successfully debase the dollar while attempting to hold down the price of gold and silver, as well as other commodities. If investors believe the dollar remains safe, they'll continue to pour money into it even though it is under attack by the Fed itself. In other words, it's trying to keep inflation in check by making investors believe it may stop stimulating at any time.
That's not even close to the truth, but the idea has now been planted in the minds of investors, so they are paralyzed some in regard to putting money in gold as a place of safety. Some actually believe the Fed minutes point to a possible end to quantitative easing, when in fact there is no such idea in the near-term suggesting the Fed is even contemplating it. Most investors don't understand the consequences of the Fed unwinding its positions, and so take as fact the orchestrated implanting of alleged opposition to ongoing stimulus into the Fed minutes, when the stimulus will continue on for some time to come.
Gold Traded in U.S. Dollars
All of this is to say that the continuing currency wars has helped protect the U.S. dollar from being seen as enormously weak. That has brought the price of gold down against the dollar. That means the dollar against a number of currencies has strengthened, creating the illusion it has strengthened against gold. But it's not gold that moves up and down remember, but the currencies against the gold. This is what currency wars create, and we simply need to watch it unfold and play out, looking for the time when the dollar begins its inevitable decline.
A Word on Silver
Much of what has been said about currencies and gold can be applied to silver, with the obvious exception silver has far more industrial uses and so has dual demand in that regard; both in supply and demand, as well as its being regarded as an investment metal like gold is. Without getting into the specifics of the enormous number of products now needing silver, let it suffice to say the macro-economic situation in the world - including the growing population and emerging markets - guarantees an enormous industrial demand for silver for many years into the future.
Silver demand and consumption has nowhere to go but up
The price of silver will jump up when it is understood and realized it will be difficult - if not impossible - to meet the demand for the white metal. As far as the price goes, I'm not going to enter that game as far as predicting one. The reason I say that is we are without a historical road map when contemplating and researching silver shortages; there has never been a shortage. We do know when the Hunt brothers tried to corner the market years ago, the price of silver shot up exponentially.
The reason silver is having difficulty pushing up in price is because the silver shorts at this time that are depressing the price. That can't and won't last, although it's impossible to know when that will stop. One thing to consider is there are no supports in place for silver as there are with gold, so when silver shortages are recognized as the reality and the price of silver shoots up, there will be some silver shorts who won't be able to get out that will be crushed.
It will happen. For silver prices, it's more important to look at an inevitable shortage than it is to look at inflation and the fear factor as those looking at gold must do. They come into play with silver, but the real impetus for soaring silver prices will be its inability to meet growing industrial demand rather than its relationship to its investment side.
That's not to say the price of silver couldn't or won't go up based upon its being an alternative to the U.S. dollar, because it will. It simply means the big move in the price of silver will be as a result of shortages, not because of the money supply and inflation. Since silver will move up on both, a growing number of investors believe it could be the most significant asset class of the next decade. I tend to believe they're right.
Silver Investing Strategy
To me, silver shouldn't be invested in using borrowed funds, but rather should be invested in as capital becomes available. That's because there will be a time when the shorts get hammered, and we don't want to be in that position when it happens. Silver shortages ensure that it will happen. We should be positioned accordingly.
Conclusion
The reason for the downward pressure on the price of gold is the ongoing currency wars. The U.S. dollar is still very flawed, but because of the stimulus associated with major currencies it gives the impression of strength because other currencies are also being debased by the respective central banks in each country. The goal of the Federal Reserve is to debase the U.S. dollar. It won't stop until it has accomplished that goal, and there is no way there is any chance whatsoever the Fed is really considering ending stimulus any time in the near future.
Even so, the resiliency of gold is seen by the fact it is still holding its own fairly well in a very difficult environment. Gold will catch up with the money policies of nations as people increasingly grow wary concerning the viability of paper, fiat currencies. That and the pattern of cyclical, but linear currency debasement against gold as a consequence of the current wars means the price of gold will rebound once the effects of debasement comes around again to land on the U.S. dollar.
As for silver, it will be affected by the same forces, although its major move up will be in response to the shortages that are coming and the resultant spike in prices in conjunction with soaring demand. What if you believe there is a recovery? Sorry to hear that. But if you do, be aware that it is at best tenuous and very slow. It won't affect Federal Reserve policy or the currency wars, so everything mentioned in the article will still hold for some time.
The Fed will continue to stimulate, the dollar will continue to fall in value, and the price of gold and silver will rise in response to that.
Most mainstream media outlets point to the alleged recovery in the United States as a major reason, but that's in reality not even part of the equation. The reason a recovery is cited as important for gold and silver prices is the assumption the Federal Reserve will stop its easing program sooner than expected.
While there are all sorts of assertions of recovery thrown around in the financial media, most institutional and private investors know the difference, even if the general population doesn't. A so-called recovery isn't even part of the picture, and shouldn't be seriously considered in relationship to the prices of gold or silver.
The exception to that would be the industrial demand for silver which would result in higher silver prices. But there has to be an actual strong recovery for that to be considered in the price equation. Some may ask about the recently released job figures, which appear to confirm robust economic growth in the United States.
But the data aren't even close to being significant, as evidenced by the fact the participation rate of the labor force has plummeted to 63.5 percent; the lowest level since 1981. That is a big contributor to the 7.7 percent unemployment rate released. That and the quality of jobs and suspicions many of those getting jobs were actually obtaining second jobs because of the requirements surrounding Obamacare, which make the job numbers very dubious.
Another factor is the number of people no longer being counted in the labor force have jumped by almost 300,000 in January, which is larger than the alleged number of jobs created. Consequently, we must look past the headlines to see the actual data.
For example, a significant 48,000 of the jobs created were in the construction industry, which were the result of the $40 billion in monthly acquisitions of mortgage backed securities by the Federal Reserve.
Some may think that it means stimulus is working, but on the contrary, it means the jobs are being artificially created and propped up, and when the Fed stops pumping money into the economy and/or begins to unwind it's positions, the economic house of cards will collapse around them. Rising interest rates will result in similar consequences. On the other hand, only 14,000 of the jobs added in January were in manufacturing, which would have pointed to a sustainable growth pattern if the numbers were higher. So the economic picture remains grim, and the U.S. economy continues to falter and struggle.
Fed Strategy
For those that don't understand the monetary policy of the Federal Reserve, it is probably thought the latest job-creation numbers point to wild success for the central bank. It's actually the opposite because the overall stated purpose of quantitative easing is failing at this time, which is to debase the U.S. dollar. What that means is the Fed will continue to print money indefinitely, and could even ramp up the printing presses more ... and probably will. The Federal Reserve wants a weaker, not a stronger dollar. We'll get into the why of that a little further into the article.
Fed minutes
Before we go on, there is a need to point out the latest minutes from the Federal Reserve which supposedly pointed to internal disagreement about the loose-money policies it is now engaged in. A large number of investors actually ate this up, thinking the Fed was indecisive over whether or not it was going to continue on with its stimulus program over the long haul. It was undoubtedly a ruse.
The Fed has absolutely no intention of ending quantitative easing any time soon. The comments in the Fed minutes were obviously orchestrated to create a sense of uncertainty around its practices and outlook. The question is why did they want that to be layered on the public investment psyche? This is important because it seems to contradict the goal of debasing the U.S. dollar even further.
I don't think it's anything more than creating some doubt in the minds of those who believed they had the moves of the Fed figured out. Almost no one has been uncertain as to what the Fed would do lately, and so that allows for a number of investors to position themselves for huge gains. That includes other countries as well. So to generate some confusion in the minds of people was the goal there, and it has of course worked, as the idea of an ongoing recovery has been successfully planted in the minds of investors. Now many think sometime soon the Fed could end its stimulus, even though by its own unemployment parameters it's far from its stated goal.
Why the Federal Reserve Failed to Weaken U.S. Dollar
Okay. The Fed failed to lower the value of the U.S. dollar. The reason is that we are in the midst of a currency war, even though it is asserted that isn't the case. And don't be confused by the origin of the war: it's the Federal Reserve and its lengthy loose money policy that kicked it all off. The reason the dollar isn't falling in value is because the central banks of other nations have responded with their own stimulation efforts; the most recent and important being Japan.
Nothing but a currency war, or aggressive response to the policies of the Federal Reserve could have kept the price of the U.S. dollar from falling. The fact that the dollar is perceived to be so strong confirms the fact there is a currency war going on. Nothing else can account for the strength of the dollar at this time. Since it may not be obvious to a lot of readers, I include the practice of people and institutions throwing their money into U.S. dollars when they panic, which seems to be very regular these days.
Weaker competing currencies are creating the illusion of a strong and safe dollar, which is then artificially reinforced by investors pouring their money into it. This is why I tie the currency war and illusion of safety in the U.S. dollar together. They're inseparable, and so must be tied together when talking of currency movements. The perceived flight to safety is a major reason the dollar retains some of the strength it has.
Central Banks and Currency Wars
A currency war is when central banks representing different nations participating in the printing of money out of thin air. This is of course sounds like stimulus in general. The difference between that and a currency war is the degree and response of central banks to the Fed. In this case Japan has boosted its stimulus enormously, and so the yen has moved lower against the dollar.
While we have no idea when it will change, the outcome of all of this for the U.S. dollar is it will probably continue to remain strong for a season, and so the Federal Reserve will continue to print or respond to competing stimulus efforts in order to bring the value of the dollar down. Eventually it will cause investors to lose faith in the dollar, which at that time will experience an enormous plunge in value in a relatively short time (not instantaneously).
All of this is predicated on the fact the Fed wants a weaker U.S. dollar. The only way to get it is to continue printing money. The outcome of that is obvious, and only a matter of when, not if it happens.
Currency Wars are Predictable
What's interesting about currency wars is there are recent historical data which can be used to learn how the currencies respond. While a currency war is cyclical in regard to different currencies, they are linear in nature, which means they are predictable and easily identifiable. Already noted is the predictability of the response of the Federal Reserve to competing central banks in regard to its policy of debasing the dollar.
The next stage is to see which currencies will be affected and how by that battle. Over the last couple of years we can easily see how the battle of currencies played out with the dollar, the euro, and now the yen. This is where gold now comes into the picture. To see the movement of the value of currencies, it must be measured against gold in relationship to a specific currency. In the case of the U.S. dollar, it reached a top in September 2011.
About a year later the same happened in regard to euro gold. Now we have yen gold approaching history highs. The pattern is easy to see, and as mentioned - predictable. The metric is simply the price of gold reflected in the currency in question. So currencies move in a predictable manner as they devalue in relationship to gold.
After the yen the British pound will probably be next in line to move in the same manner. When the cycle comes back to the U.S. dollar, it is at that time the projections of much higher gold and silver prices will kick in.
Understanding Gold Prices and Currencies
Many investors don't have an understanding of what is happening with gold when talking of its price, so let's look quickly at what it really means. When talking about the price of gold and whether the movement is up or down, in reality what is being talked about is the strength or weakness of a currency that is being determined.
Gold itself is inert and actually stays neutral as a store of value. The price of gold moves in direct correlation to the strength or weakness of currencies. Again, this is why major currencies in a currency war can be identified fairly accurately as to their strength in relationship to gold. Just keep in mind it's the currency that is actually being measured against gold, not the value of gold in and of itself that is going up or down on its own.
Gold and Fed Minutes
Let's revisit the Fed minutes again. Why did the Fed have the comments about its policy in them? It wants to keep investors off balance. That is important because it is in order to be able to successfully debase the dollar while attempting to hold down the price of gold and silver, as well as other commodities. If investors believe the dollar remains safe, they'll continue to pour money into it even though it is under attack by the Fed itself. In other words, it's trying to keep inflation in check by making investors believe it may stop stimulating at any time.
That's not even close to the truth, but the idea has now been planted in the minds of investors, so they are paralyzed some in regard to putting money in gold as a place of safety. Some actually believe the Fed minutes point to a possible end to quantitative easing, when in fact there is no such idea in the near-term suggesting the Fed is even contemplating it. Most investors don't understand the consequences of the Fed unwinding its positions, and so take as fact the orchestrated implanting of alleged opposition to ongoing stimulus into the Fed minutes, when the stimulus will continue on for some time to come.
Gold Traded in U.S. Dollars
All of this is to say that the continuing currency wars has helped protect the U.S. dollar from being seen as enormously weak. That has brought the price of gold down against the dollar. That means the dollar against a number of currencies has strengthened, creating the illusion it has strengthened against gold. But it's not gold that moves up and down remember, but the currencies against the gold. This is what currency wars create, and we simply need to watch it unfold and play out, looking for the time when the dollar begins its inevitable decline.
A Word on Silver
Much of what has been said about currencies and gold can be applied to silver, with the obvious exception silver has far more industrial uses and so has dual demand in that regard; both in supply and demand, as well as its being regarded as an investment metal like gold is. Without getting into the specifics of the enormous number of products now needing silver, let it suffice to say the macro-economic situation in the world - including the growing population and emerging markets - guarantees an enormous industrial demand for silver for many years into the future.
Silver demand and consumption has nowhere to go but up
The price of silver will jump up when it is understood and realized it will be difficult - if not impossible - to meet the demand for the white metal. As far as the price goes, I'm not going to enter that game as far as predicting one. The reason I say that is we are without a historical road map when contemplating and researching silver shortages; there has never been a shortage. We do know when the Hunt brothers tried to corner the market years ago, the price of silver shot up exponentially.
The reason silver is having difficulty pushing up in price is because the silver shorts at this time that are depressing the price. That can't and won't last, although it's impossible to know when that will stop. One thing to consider is there are no supports in place for silver as there are with gold, so when silver shortages are recognized as the reality and the price of silver shoots up, there will be some silver shorts who won't be able to get out that will be crushed.
It will happen. For silver prices, it's more important to look at an inevitable shortage than it is to look at inflation and the fear factor as those looking at gold must do. They come into play with silver, but the real impetus for soaring silver prices will be its inability to meet growing industrial demand rather than its relationship to its investment side.
That's not to say the price of silver couldn't or won't go up based upon its being an alternative to the U.S. dollar, because it will. It simply means the big move in the price of silver will be as a result of shortages, not because of the money supply and inflation. Since silver will move up on both, a growing number of investors believe it could be the most significant asset class of the next decade. I tend to believe they're right.
Silver Investing Strategy
To me, silver shouldn't be invested in using borrowed funds, but rather should be invested in as capital becomes available. That's because there will be a time when the shorts get hammered, and we don't want to be in that position when it happens. Silver shortages ensure that it will happen. We should be positioned accordingly.
Conclusion
The reason for the downward pressure on the price of gold is the ongoing currency wars. The U.S. dollar is still very flawed, but because of the stimulus associated with major currencies it gives the impression of strength because other currencies are also being debased by the respective central banks in each country. The goal of the Federal Reserve is to debase the U.S. dollar. It won't stop until it has accomplished that goal, and there is no way there is any chance whatsoever the Fed is really considering ending stimulus any time in the near future.
Even so, the resiliency of gold is seen by the fact it is still holding its own fairly well in a very difficult environment. Gold will catch up with the money policies of nations as people increasingly grow wary concerning the viability of paper, fiat currencies. That and the pattern of cyclical, but linear currency debasement against gold as a consequence of the current wars means the price of gold will rebound once the effects of debasement comes around again to land on the U.S. dollar.
As for silver, it will be affected by the same forces, although its major move up will be in response to the shortages that are coming and the resultant spike in prices in conjunction with soaring demand. What if you believe there is a recovery? Sorry to hear that. But if you do, be aware that it is at best tenuous and very slow. It won't affect Federal Reserve policy or the currency wars, so everything mentioned in the article will still hold for some time.
The Fed will continue to stimulate, the dollar will continue to fall in value, and the price of gold and silver will rise in response to that.
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