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Jeff Nielson is the writer/editor of Bullion Bulls Canada. He came to the precious metals sector as an investor in the middle of last decade, and quickly decided this was where he wanted to focus his career. Jeff's background includes four years of Economics at the University of British Columbia, before he went on to earn his law degree from that same institution.

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Gold “Losing” Battle Versus U.S. Dollar in 2012?

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Originally appeared as http://www.bullionbullscanada.com/gold-commentary/25489-gold-losing-battle-versus-us-dollar-in-2012

Gold bears are exuberant these days. Their mood is epitomized by a recent Bloomberg headline:  “Gold Erases Year’s Gain as Europe Concern Boosts Dollar” – which was then dutifully parroted by thousands of mainstream drones. The implication was clear: gold was on its way down and the dollar is on its way “up”, so everyone should sell their gold.

Such confidence (depending on the source) is a reflection of either serial dishonesty or extreme delusion. The dollar-shills at Bloomberg explained what was happening:

concern that Europe’s debt-crisis is deepening strengthened the dollar [emphasis mine].

Let’s examine that short statement. Let’s totally put aside the fact that Europe’s debt-crisis was caused by the economic terrorism of Wall Street bankers. Again it is clear what Bloomberg is implying: the euro is weakening and the dollar is strengthening.

I’ve dealt with this inherently and deliberately dishonest statement by the mainstream media on multiple occasions in the past. In the past 100 years (i.e. ever since the Federal Reserve was given the responsibility of “protecting the dollar”) the U.S. dollar has lost 98% of its value. That rate of collapse has increased significantly in the past 40 years (i.e. ever since Nixon eliminated the last vestige of a gold standard).

The dollar is not “strengthening” – that is an outright lie. It is simply plummeting a little less slowly than the other (worthless) paper. Example: two people jump off a 100-storey building at the same time. While falling, one of the individuals climbs on top of the shoulders of the other one.

Has that individual “strengthened” himself? Obviously not. He will simply go “splat” a millisecond later.

(Legitimate) gold commentators have explained this basic fact again and again, yet had little success in penetrating the media’s brainwashing. So let me try a personal anecdote which might be more successful in reaching the gastrically-inclined mind of the average North American.

Having an unusually hot May day on the West Coast yesterday, I decided to opt for a cool submarine sandwich for dinner, and headed to Subway for the first time in several years. I ordered my favorite foot-long sandwich, and had it prepared exactly as I had done when I used to purchase sub’s on a more regular basis.

However where my memory clashed with reality was when I went to pay for my sub. The cashier asked for $8.50. I politely informed her that she had quoted the wrong price – and pointed to the $4.50 posted on the wall, the price I used to pay for my favorite sub.

She politely corrected me that I had (carelessly) quoted the price for a six-inch sandwich, not the foot-long. I had yet another experience with 21st century “sticker shock”: in just a few years my paper had (literally) lost half its value.

Then there is gold. A hundred years ago, a man could purchase a fine suit for an ounce of gold. Two thousand years ago, stylish Romans could purchase the finest toga for an ounce of gold. And today, despite the fact that gold has been pushed more than 20% below its recent high, one could still buy a more-than-adequate suit for the $1550 currently quoted for an ounce of gold.

Yet for 100 years, as the U.S. dollar has been relentlessly losing virtually all of its value, while gold has virtually perfectly preserved its entire value we have been hearing a consistent message from the mainstream media: the U.S. dollar is a “safe haven”, while gold is a “barbarous relic”.

How can the media tell us that the bankers’ paper, which has already lost almost all of its value is “safe”? How can the media tell us that gold, which perfectly protects the wealth of the holder century after century is “too risky”? The media lies.

As I wrote previously, gold is a perfect vessel for storing one’s wealth (safely), while the U.S. dollar is nothing more than a “leaky bucket”. So when we hear the media maliciously whispering in our ears that we should sell an asset because “it’s losing value”, then obviously the first thing we should be dumping is anything and everything denominated in U.S. dollars. Better late than never!

Of course this is only one reason why the dishonest gold bears urge gold- and silver-holders to dump their precious metals (any time and every time the banking cabal gets some traction with their market-manipulation). Since the price of gold is usually going up, the much more common reason why the mainstream Chicken Littles “warn us” to sell our gold is because it is a “bubble” – precisely what they were clucking only a few months earlier.

As I and many others have explained (again and again), the so-called “record price” for gold a few months ago was anything but. Even using the phony, “official” inflation numbers of the U.S. government, the price of gold would have had to go to roughly $2500/oz just to equal its previous high from 1980.

However, for any people who choose to use real inflation numbers to discount the price of gold (like John Williams of Shadowstats.com), then we calculate that the price of gold would have to rise to over $7000/oz just to equal the 1980 price. Meanwhile, Bloomberg was recently reporting (out of the other side of its mouth) that the gold miners were struggling to remain profitable at current prices. Some “bubble”!

Then there is the U.S. Treasuries market. Unlike other markets, we don’t have to discount Treasuries for inflation to examine their prices, since Treasury prices are a direct, inverse function of interest rates. Put another way, as interest rates go to zero Treasuries (and any bonds) go to their maximum theoretical price – since obviously lenders do not pay borrowers to lend them money.

What have we seen in the U.S. Treasuries market for the past four years? The Federal Reserve has permanently frozen interest rates at 0% (the absolute maximum), and then printed-up countless $billions buying-up every (unwanted) Treasury in sight, to push the effective price for Treasuries closer and closer to its theoretical maximum.

Now what do we see today in the U.S. Treasuries market today? Treasuries officials are busily restructuring the market, in anticipation of buyers lining up to pay higher-than-maximum prices. Talk about déjà vu!

In 2006, after U.S. house prices had tripled in roughly a decade, Chief Market-Pumper B.S. Bernanke was getting in front of microphones on a daily basis boasting about the U.S. “Goldilocks economy”, where house prices would just keep going up “forever”. However, there is one huge difference between the delusional (dishonest?) words of B.S. Bernanke in 2006 versus the delusional actions of Treasury officials today – in preparing for higher-than-maximum prices.

House prices have no built-in “maximum price”. It was at least theoretically possible that Bernanke’s market-pumping could have continued for a little longer…and then the bubble would have burst. With the U.S. Treasuries market, this is it: maximum prices already.

Maximum prices, at a time when maximum supply is being dumped onto the market (and the supply continues to increase). Maximum prices, despite the fact that one-by-one the buyers of U.S. Treasuries are dropping out of the market. Indeed, the former largest buyer – China – is now a (competing) seller of Treasuries, further undercutting prices. In other words, if one were to construct some extreme, hypothetical example in order to illustrate the definition of an asset bubble in its most-obvious form, it would be impossible to invent a better example than today’s U.S. Treasuries market.

So when readers are subjected to more of the dishonest fear-mongering from the mainstream media that we should sell our gold because it’s “losing value”, as a matter of simple logic we should not begin to sell our first ounce of gold until we have already rid ourselves of our last, dying U.S. dollar.

And when a few months down the road (when bullion prices are again soaring) we hear the mainstream media talking out of the other side of their mouths and telling us to sell our gold because “it’s a bubble”, again our rational strategy is clear. We should not begin to sell our first ounce of gold until we have already rid ourselves of our last U.S. (bubble) bond – assuming that bubble hasn’t already collapsed.

There Is 1 Response So Far. »

  1. If Bloomberg and others state that Euro Concerns cause gold to go down vs the dollar, they are not incorrect – if you consider the short term. Euro concerns cause money to flow to US Treasuries and since the value Gold is referenced in US Dollars, they are correct.

    In the long term however, they are incorrect as history has shown.

    So if you are a frequent trader expecting a decent return in say, the next 12 months, you may be out of luck. If however, you are long on Gold, you may well win handsome returns.

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