Threat to Petrodollar Sees Gold Surge to Near Record Highs 15 comments
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The dollar came under sustained pressure as the Independent of London’s Robert Fisk broke a story stating that a group of Arab countries, Russia, France, Japan and China and others were in secret discussions to use a basket of currencies and gold to replace the dollar in order to trade oil. Although some officials have denied this report, the fact that it is mentioned at all raises the question as to how much longer the dollar will remain the global reserve currency. According to Chinese banking sources, the transitional currency in the move away from dollars, may well be gold.
Gold surged to $1,021/oz on the news of this increasing threat to the petrodollar. The unexpected move by the Australian central bank to increase interest rates may have also pressurised the dollar. At some stage central banks will have to start withdrawing the unprecedented monetary stimulus of recent months and years. A rising interest rate environment from the unprecedented historic low rates we have now is bullish for gold as it was in the rising interest rate environment of the 1970s. Gold has risen through resistance at $1,020/oz in recent minutes to as high as $1,025/oz and looks set to challenge the record (nominal) high of $1,033/oz. A close above the record high should set us up for the anticipated rally to $1,200/oz.
Silver
Silver also moved upwards on the above news and is currently at $16.91/oz.
Platinum Group Metals
Platinum, palladium and rhodium are all up in morning trading at $1,300/oz, $302/oz and $1,575/$1,675/oz respectively.
Disclosure: no positions
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Fisking: en.wikipedia.org/wiki/...
As for Robert Fisk himself, in a 2005 interview he stated that he was unaware of the term. "I have to be honest: I don't use the Internet. I've never seen a blog in my life. I don't even use email, I don't waste my time with this. I am not interested. I couldn't care less. I think the Internet has become a hate machine for a lot of people and I want nothing to do with it."[6]
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Please tell Matt this breaking of rank is the actual news of the day. Apparently sidecreek media, chattering head arbiters of all things weighty and meaty, get their bones to chew fresh from Drudge's butchershop. One gets the sense of him sitting there in that goofy hat pulling on their marionette strings when he deigns to toy with them just to watch'm dance.
i think 1050/oz of GOLD is reachable today
Good, cause i want to get paid in gold! :)
Keep an eye on the rumors that China will ban exports of gold, a move that would presage an attack on the petrodollar (which would be an initial move in de-coupling the yuan from the dollar).
Future interest rate hikes (starting VERY small, the Aussie hike was just .25) are like planes circling Hartsfield airport, stacked to the sky. Patience waiting for the American government to get "ready" for higher rates is evaporating rapidly.
No, I didn't think so. But hey, I have a slightly used bridge in a primo location you might be interested in .
On Oct 06 10:13 AM JeffDB wrote:
> I would think that rising interest rates would be bearish for gold
> and other commodities held in lieu of cash. Of course that's only
> one variable and could be overwhelmed by other forces, but all other
> things being equal, I would figure rising interest rates would put
> downward pressure on gold.
> Uh... Jeff? If the CASH is depreciating FASTER than the interest
> being earned on it ....... you want to hold that CASH ?
No, of course not. But that is why I included a caveat:
"Of course that's only one variable and could be overwhelmed by other forces, but all other things being equal, I would figure rising interest rates would put downward pressure on gold."
The operative phrase being "all other things being equal". If the ONLY thing that changed was the interest rates, that should put downward pressure on gold -- though that downward pressure could certainly be overwhelmed by other forces.
Let me make up some numbers for discussion purposes. If the dollar were depreciating by by say 8% per year and interest rates were zero and gold was trading at $1000 per ounce, I believe raising rates should exert some downward influence on the price of gold.
Presumably that $1,000 price already took into account the fact that the dollar was depreciating. The market apparently considered it worth $1,000 based at least in part on that fact, but also on the fact that an alternative asset - ie. cash in a savings account or money market was not earning anything at all.
To make the example more dramatic, lets have the Fed take drastic action and raise the rates causing the money market rates to go up to 5%. If the markets had been in rough equilibrium at that time and no other central banks changed their monetary policy at the same time, one side effect of that would likely be to give a boost to demand for dollars. Some folks would decide to move from currencies with a lower real return to the dollar. The over all effect is typically to strengthen the dollar or at least slow its fall.
But even if we discount that likely effect and say that it does not strengthen the dollar, it would still have the tendency to lure some away from gold and into cash. It might not have that effect on you or on many others, but at least *some* people are likely to move a little of their assets from gold to cash. Rather than the 5% negative return on cash they would be getting a 3% positive return.
Someone who is retired, or has some kids ready to start college are probably a little more likely to make the change a little sooner than they might otherwise have done. Others might be a little less likely to buy gold or add to their holdings if they feel they are getting a reasonable return on a safe, liquid asset.
No big deal, but that's the way I see it. I also remember seeing some gold stocks drop, along with just about everything else, when interest rates went up in the 1980s.
Let me add a couple of interesting notes from my own blog today:
With COMEX shorts at near record highs, I expect we will soon have a new crop of gold buyers. I have been speculating for weeks that this could happen, as it's just too easy to short gold every time it becomes technically overbought. The shortsellers are now facing combined seasonal and cyclical strength in the gold market which overrides such technical factors as MACD and relative strength.
I expect that the savvy shorts will wait for a pullback from here to buy (that is, they're too smart to all buy at once), but now they will be gaming each other, so I'm not sure how many opportunities the shorts are going to have to buy back gold at much lower prices than we are seeing today. Those who wait for the dust to settle could end up holding the bag for larger losses. So who says that short-selling hurts the gold market? The short sellers - too smart for their own good at times - have become our new best friends!
Hmmm... Here's an interesting tidbit. It turns out the commercial shortsellers in gold are primarily US banks. According to Gene Arensberg, "Just three U.S. banks, the largest of the largest hedgers and short sellers, accounted for six-tenths of all the large commercial net short positioning on the COMEX. It doesn’t take a Harvard economics degree or a Goldman Sachs quant box to understand that the short side – the side which benefits if prices fall – is dominated by a very small, very powerful elite group of financial 'wizards' whose ability to manage risk is now highly questionable."
Let me add to Mr Arensberg's sage comments that a Harvard degree would probably be a disadvantage to a gold market investor at this particular moment in history.
My meditation for today: So, the folks who got trillions in government bailouts are now placing these taxpayer-donated funds on the short side of the gold market? Hey, I'm not complaining --- it's all helping me. But I certainly feel sorry for the US taxpayers who are now going to be absorbing the big US banks' large losses arising from their decision to crowd in like a flock of geese to short the COMEX gold market!
Interest rates will rise when the currency is under pressure and bonds can't be sold.
That is strongly gold bullish, not bearish at all.
In fact, I'm sorry that gold does so well when other indicators are negative. It is just the reality of the present marketplace. I'd be investing in mainstream businesses if I thought the prospects were promising. Unfortunately, it isn't like that due to the borrow, print and spend policies of central banks and governments in the Greenspan (and post-Greenspan) era.
The US will not be raising rates and therefore the move to gold will increase. There seems to be many factors supporting gold at this moment. A strong dollar is spoken but a weak dollar is what will help us re- gain our strengths.
Gold $1100 may be seen by next week.
John
> Re: Interest rates and the gold price.
Interest rates will rise when the currency is under pressure and bonds can't be sold. >
I'll agree that gold and interest rates can often move together, but I think gold is rising *despite* the rise in interest rates, not *because* of rising rates.
They are both responding to the same phenomenon/stimulus. When the money supply is expanding too rapidly &/or when inflation is heating up gold will obviously have a tendency to go up. In those same circumstances, when central governments become concerned about inflation &/or a devaluation in the currency they will typically respond by raising interest rates. Therefore both will go up at the same time early, but the higher interest rates will tend to have the effect of increasing the value of the currency, or at least slowing its decline. Higher interest rates will also tend to make the bonds of that country more palatable. It will also have a tendency to reduce the money supply and to put the brakes on the economy.
> That is strongly gold bullish, not bearish at all. >
I should have noted that rising interest rates in Australia would be bearish for the dollar and hence bullish for gold IF the US keeps its interest rates low. Higher rates in Australia would tend to pull investors away from US bonds etc. and towards Australian ones where they can earn higher interest.
This appears to be more of a "falling dollar" than a "rising gold" phenomenon:
Price of Gold in Dollars (Record High), Euros (-10%) and Yen (-10%)
seekingalpha.com/artic...
Rising rates in the U.S. might occur concurrently with rising gold prices, but their effect would tend to dampen gold prices. When Volker raised interest rates aggressively in the 1980s to fight inflation it hammered virtually all asset classes. Bonds issued at the lower rates obviously suffered. But so did equities, commodities and real estate. Gold didn't pay interest but debt instruments did and at high rates. That was a pretty good investment when interest rates were significantly above the inflation rate. Money market funds were paying double digit rates.
> In fact, I'm sorry that gold does so well when other indicators are negative. It is just the reality of the present marketplace. >
I personally consider that one of the advantages of gold based investments. They help to moderate the volatility in a portfolio. Unfortunately, I don't think that will hold true, however, if the Fed comes out aggressively raising interest rates as some of them seem to be hinting at. I think we would see a similar pattern to what happened in the 1980s. Cash would be the place to be just before they made such a move, assuming they were serious about raising rates high enough to halt inflation. I have reservations about whether they have the guts to do that, however, and that is a very big wild card in my opinion.
> I'd be investing in mainstream businesses if I thought the prospects were promising. Unfortunately, it isn't like that due to the borrow, print and spend policies of central banks and governments in the Greenspan (and post-Greenspan) era. >
I agree with you there.
> Volker raised interest rates 9 % over the rate of inflation. I don't
> see this Fed doing that.
I hope it doesn't come to that, and even if that would be the prudent thing to do I wouldn't be surprised if they balked at it. But who knows? There are a number of factors in play that have set the stage for the possibility of a hefty dose of inflation and once that genie gets out of the bottle drastic measures may be needed. I doubt many expected Volker to do what he did and we don't know what administration may be in power if/when things get nasty(ier).
But the original point I was trying to make, which is apparently a bit more contentious than I would have expected, is that a low interest rate, easy money environment is more bullish for gold than a higher interest rate, tighter monetary policy environment would be.
> Future interest rate hikes (starting VERY small, the Aussie hike
> was just .25) are like planes circling Hartsfield airport, stacked
> to the sky. Patience waiting for the American government to get
> "ready" for higher rates is evaporating rapidly.<
Bernanke has no intention of rescuing the dollar with higher rates. He's already said he'll hold them steady near zero for the next 18 months or so. He forgot to tell the real reason though. The real reason is so that his masters can borrow a few trillion more (very few others can borrow money, but the black lords who pull his strings can) at zero interest and make a ton of money on the gold rush or in any instrument for that matter, that yeilds anything greater than just 1%. IOW, he's only pandering to his bosses so they can line their pockets yet again, at the expense of the dollar and therefore at the expense of the good American people. The fact that the American economy and American people get slaughtered by inflation is totally irrelevant to these greedy bastards.
Inflation is the most horrible of taxes. Income taxes, tax what you earn. Inflation is tax on everything you have (and everything you have has already been taxed god knows how many times).
It's time to take these pigs out behind the barn, and Ron Paul's bill is a good start.