Best 'Currency' Right Now? It Might Be Gold 11 comments
-
Font Size:
-
Print
- TweetThis
One day, the Dow rises nearly 300 points. The next day, it gives it all back. United Airlines (UAUA) is down 99% one minute. A few hours later, it's back to even. In the evening, Lehman (LEH) is solvent. By the next morning, the company has filed for Chapter 11 bankruptcy. Bernanke is forming complete sentences at the start of the day but by the evening...
Fear rules the day. There is a general liquidation underway. About the only things increasing in value in recent weeks are the U.S. dollar, U.S. treasury securities, alcohol sales, and irritable bowel prescriptions. As for the dollar, there has been speculation that the dollar rally is the product of coordinated intervention from the U.S., Europe, and Japan given recent reports of just such a plan being drafted back in March. Given the fundamentals in the U.S., I wouldn't rule this out.
Aside from possible government intervention, the best thing the dollar has going for it right now is that it's not the Euro or any of the commodity-based or emerging market currencies. People have to keep their money in some currency, and as money is extracted from markets around the world, investors are choosing to move it to the "safe" U.S. dollar. Although this dollar rally has been powerful, its sustainability needs to be seriously questioned given the following:
- The U.S. government is now on the hook for future Fannie (FNM)/Freddie (FRE) losses. Total losses will depend on the severity of the housing/credit debacle, but it isn't a stretch to imagine losses in the $1 trillion range.
- The U.S. budget deficit in August alone was $112 billion.
- The U.S budget deficit is forecast to be $407 billion in 2008 and a record $438 billion in 2009.
- The $438 billion for 2009 does not include any funds used to "conserve" Freddie or Fannie or any new fiscal stimulus package, and it doesn't account for the full cost of the Iraq War (let alone any new incursion into Iran, the Caucasus region, or Pakistan/Afghanistan).
- About the only thing supporting GDP growth in the past two quarters has been net exports, thanks to the falling value of the dollar. The recent strength in the dollar is likely to blunt this tailwind.
- The risk of competitive currency devaluations is very real as every country battles for a piece of the shrinking pie of investment and consumption spending.
- The Fed continues to swap high-quality Treasury securities for garbage securities.
- U.S. unfunded liabilities range from $50 trillion to $95 trillion (depending on the assumptions used).
Of course, we don't have the money to pay for any of these items since our national debt exceeds $9.6 trillion, and we're already running an annual budget deficit. So, our over-leveraged government will have to rely even more on the kindness of strangers to fund our spending.
A borrower living beyond her means. Using her "home" as an ATM. Deteriorating credit score. Stagnating real income. Dependent on low-cost borrowings. Sound familiar?
It's comically implausible that our financial obligations will be repaid with dollars worth anything close to their current value. (The dollar has lost 95% of its purchasing power since the Federal Reserve system was created in 1913. Given our current debt situation, this trend is certain to continue over time.) The difference between the U.S. Government and a subprime borrower is that the government controls the printing presses. There is little doubt that the presses will be working over-time in the years to come.
As history has shown, all fiat currencies are ultimately doomed. The temptation to devalue the currency is just too great over time. The dollar may continue its near-term rally as investors search for "safety" and/or if government intervention is indeed underway. Ultimately, however, the fundamentals will matter again.
Our Chinese Yuan and Japanese Yen exposure have held up fairly well this year, but the "currency" position that we find the most intriguing currently is one that has stood the test of time and held its value for hundreds of years. This solid currency has been caught up in the recent wave of asset deflation and is now off its recent peak by about 25%.
I'm talking about gold (and silver). As I always caution, trying to pick bottoms is futile, as is trying to time short-term moves. In the current environment, the curtailing of risk, fund redemptions, and losses on a variety of securities is forcing the sale of virtually all liquid assets, including precious metals.
However, given the poor and deteriorating financial condition of the U.S., the need for our government to continue depreciating the dollar over time, the historical track record of all fiat currencies, the recent pullback in the price of gold and silver, and the supply constraints facing mining companies today, this may well prove to be another excellent long-term opportunity to add to gold and silver. We are increasing exposure in most portfolios at these levels.
Disclosure: The Rubbernecker is long alchemy and sluice boxes and short printing presses.
Related Articles
|
Find People on SA
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largest
increase in followers
in the last 7 days-
1
David Fry
-
2
Bill Gross
-
3
Philip Davis
-
4
Tyler Durden
-
5
TraderMark
Fastest Climbers » -
1
-
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 11 comments:
Finally.... The dominos fall and the dust settles and the admissions begin.. Read back on earlier posts for more revelations of massive intervention. Massive meltdown ahead...Bernanke and friends just postponed the massacre..
How the price can decline during an apparent shortage is beyond me so I just keep buying it at every opportunity.The premium I pay now will be small change when the paper market implodes :)
I am waiting patiently for the markets to tell me that they have bottomed. I might lose some of the upside, but I am not going to buy simply because things look cheap as opposed to last week. With that reasoning, I would be buying all the way down with commodities, foreign countries, foreign currencies and precious metals.
Gold is only a "commodity" in the broadest sense of the word. It's really MONEY. Looking at gold in a NOMINAL sense will NEVER take you where you want to go...look at it in a REAL sense. So..if the DOW is declining 4.42% (Monday, Sep 15th..2008) and gold is rising 2.6% on the same day tell me that gold is like zinc..or coal..That's nonsense.
Gold is an alternative currency....ignore it at your risk.
Pathetic. Somebody needs to have their pulse checked. Highest foreclosure rate since the Great Depression? The middle class is dying!! Sure things look good for the rich Republicans, generally they are the ones taking profits on Freddie and Fannie and fleeing the room!!
Ridiculous!!
AMV, we're not in a deflationary environment. Once the deleveraging is over and the Fed further reinflates, the fact that we're in an inflationary environment will be more obvious.