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.


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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