Dollar on the Decline, Gold and Silver on the Rise

Fed interest rates close to zero mark a new stage in the evolution of the US financial crisis, and the accompanying statement suggested that we may have rates at this level for a long period like Japan in the 90s.

Even the most cursory glance at the US dollar chart shows a double-top and the dollar rally now looks to be definitely over. Given the inverse relationship with the gold price we can equally be sure that the yellow metal will shortly test its March highs again.

Silver up too

Silver has also bounced on the Fed rate cut but generally lags behind advances in the gold price, only to sprint up with out performance later in the rally.

After the nasty dollar rally this summer, which decimated many precious metal portfolios, this is a welcome respite for investors in this asset class. My prediction of a Gold:Dow ratio of one in 2009 looks a step closer to fulfillment.

It is clear that the US is going to use dollar devaluation as a key part of its recovery strategy, as bond holders ought to realize. At some point there will be a big rotation out of dollar assets and into a currency without government control like gold which can not be printed.

Zero coupon

Certainly there is little point is holding cash or bonds for their ability to earn income which gold can not. Investors could choose to buy equities instead but the economic outlook for 2009-10 is truly awful and price-to-earnings ratios are only a useful guide to share valuations if companies actually continue to make profits.

However, share prices may advance on a more inflationary outlook as bailouts and stimulus packages emerge, and in that case precious metal stocks are going to be the best ones to own, particularly the explorers.

Anybody checking their precious metal stocks today can see how they leveraged the gold price advance on the rate cut last night. This will continue to be the case.

Comments

[goldis4ever:]

ah, so much for "deflation". Let the party commence!!!

2008 Dec 17 08:04 AM

[De Graaf:]

Yeah, but thanks to deflation, Mr. goldis4ever,

Without deflationary forces, we wouldn't have this inflationary weapon the FED is releasing any moment now. Its balance sheet.
To counter this deflation, they bring in huge amounts of debt locked in the system, which will become inflationary when the economy picks up again. Unless the FED is able to 'suck up' those excess dollars by then, were going to see gold go upwards from here on.

The best part however for gold's sake, will be in 2010 and beyond.

brgds,

2008 Dec 17 09:34 AM

[Smarty_Pants:]

Next bubbles to burst: dollar then US bonds, in that order.

Bonds may take a while, but eventually US debt holders will realize that they are losing more in dollar devaluation than they are gaining in 'safety' and interest. When that finally happens, look out below.

2008 Dec 17 10:11 AM

[User 30121:]

I wonder where CLF is???

2008 Dec 17 08:06 PM

[fran:]

i'm not a gold bug, but periodic visits to 321gold.com provide additional subject matter of ilk covered here.

energy also covered 321enrgy.com

i have no association, but some may occasionally find interest here.

2008 Dec 17 11:04 PM