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Gold (NYSEARCA:GLD) is going through a rebalancing of value with other currencies, including the USD.  This rebalancing of the exchange rate (called by some: "the price of gold") is likely to continue for some time.  The value of the USD is in a steady decline in between fits and starts of strength, inflating the prices of commodities of all sorts.  Oil will soon follow because oil is an international commodity and must be ultimately priced in PMs.  It is fascinating to realize that the year I was born, 1949, you could buy 20 gallons of gasoline for two ounces of silver - which was the content of the common silver dollars in 1949.  They would buy $1.40 worth of stuff in 1949.  AND, that, today, September 15, 2011, you can still buy 20 gallons of gasoline for two ounces of silver, now selling for $82 in USD.  See Youtube Video HERE on the price of oil in various currencies, including gold.

Inflation is alive and well in the world today.  But, real estate is now in its fifth year of decline - deflation - due to high unemployment and a severe excess of housing inventory.  in Las Vegas today, homes of equal size, view, and location are varying in price by as much as 30%...with some varying by 40-50%, depending only on location differences within the fishbowl of the Las Vegas Valley.  And this is after an average home price decline since 2006 of 50%!!!

So, prices are rising and falling at the same time.  When prices or price spreads between various products are moving erratically in any economy, it is the measuring stick that we should blame --- the USD.  Buyers and sellers are just uncertain as to what they should pay or charge for too many things.

Gold is at this moment trading at around $1,832 per troy ounce and we are still early in the game of this possible hyperinflation rebalancing period.  After taking a rest over the 6 month period from November,'10 to April,'11 between $1333 and $1433, gold rose again perforating first $1500 then $1600, reached $1900+ several times recently just after the S&P US credit downgrade.  There appears to be no top in sight but gold will likely take a rest once buyers and sellers are back in a position of balance.

And, since US treasuries are a surrogate substitute for that actual cash in hand, UST must get repriced and yields must rise noticeably.  In Italy this week, yields have spiked with bond holders looking over their shoulders for the next Greek tragedy.  The interest rates being paid on USTs are - simply put - too low after considering how quickly the buying power of that cash (and the interest/principle that you can get back for a UST) is deteriorating.  Yields on UST would have already risen measurably if not for the incessant buying by the Fed to support the value.

Many large holders agree.  In late 2010 and early 2011, PIMCO, the world's largest holder of bonds, reported that they had sold ALL of their U.S.Treasuries.  See HERE.

The CEO OF PIMCO, Mohamed El-Erian talked candidly about why they took such a soft position in U.S.Treasuries.  See and listen HERE.

In summary, as he explained, "Every asset you hold in your portfolio must have value and must earn a position in your portfolio."  Their estimation was that having ANY position in U.S.Treasuries was unjustified.  I couldn't agree more. 

Why would anyone lend money to the USG instead of holding gold at these prices and startling increases in U.S. debt?

(1)   In effect, the Fed is overpaying for U.S. Treasuries to support their price - i.e. holding down their yield.  They must do so or risk rates rising which then would compound the US deficit problem.  PIMCO's action was driven by their thought that yields of U.S.Treasury bonds must eventually rise, which could destroy prices.
(2)  The USG is already borrowing 40% of its budget (a dangerous level based on history) and is spending 30% of every dollar it spends on interest payments (an equally dangerous ratio).
(3)  Since last fall, the only (substantive) buyer of U.S. Treasuries at their atrocious yields has been the Fed using freshly printed currency.  USTs need to be sold constantly for no other reason than to pay off older bonds that are maturing.  When a seller wants to sell or a bond needs to be paid off, there must be a buyer of new or existing bonds at some price. 
(4)   Deficit spending by the USG is a fact of life as far into the future as we can see.  We need no better proof of this than the recent "debt deal" which increased the debt ceiling by $2.5 Trillion -- more than the total accumulated debt of the USA for the first 210 years of it's existence (1776 to 1986).  Billions of dollars have no meaning any longer.  Only Trillions can move the needle on spending, stimulus, budgets, and that points to continued trillions in debt growth and deficits.
(5)  My guess is that El-Erian judged the probability of the political environment fixing the fiscal mess in the U.S. as highly unlikely.  He termed this the low probability of "convergence" of the scope of the problem and scope of the necessary fiscal discipline.
(6)   "Core inflation" (excluding food, fuel) vs "headline inflation".  PIMCO rightly concluded that there was a large discrepancy between the two and that the likelihood of these two converging - as they normally do - as low.  Normally, in a developed country like the US, these converge fairly quickly.  So, when a country the stature of the US starts to behave like a banana republic, look out.
(7)   The purchasing power of cash (and cash substitutes like UST) is being decimated by the actions of its own issuer, the US Govt.  The dollar of today has the buying power of roughly 14-15 cents from a 1971 U.S. Dollar, down 6/7 of it's buying power in only 42 years.  That is, it takes $7 of current U.S. currency to buy what you could have bought for $1 in 1971 currency.  If you'd lent $100 to the US treasury in 1971 and received 5.5% interest each year and then got your $10 back today, you'd have received a total of $33 back for your $10, which you then could have reinvested at 1.01 - 5.5% for shorter and shorter maturities as the interest came back and your total savings account would be about $10 (the original principle) plus $21.45 (interest at 5.5% for 40 years plus $25.09 interest on the reinvested interest for diminishing periods at diminishing interest rates)....or $56.54.  And it would buy the equivalent of $56.54/7 = $8.08 in goods today at 1971 prices.  You lost out on the deal. 

You have lost money....paid the US treasury to hold your money.  In that same period, the price of gold measured in USD rose from $35 to now over $1800.

Some are understanding this erosion of their T-Bill holdings.  In June, China announced that it had sold off much of its short term treasuries and has stopped buying them.  See HERE.  The largest holders of US bonds has sold out of UST or stopped buying them and nobody would have predicted that only 12 months ago.  Soon, nobody will want to own US Treasuries until the prices fall measurably.....and yields rise measurably, leaving only Ben Bernanke to hold onto the rope.

These are all predictable outcomes and are proceeding as expected.  Financial markets are looking around for "something-else" to substitute for the USD as a reserve currency.  At the very least, the possibility of a two-reserve world with the USD and that "something-else" as mutual reserves could occur soon.  As the USD loses more respect and use as a reserve currency for the world's sovereign funds and national reserve holdings, gold's price must rise to a point of balance between those who think it is undervalued in USD and those who are sure it is overvalued.

THE ROLE OF GOLD:  Gold cannot be the world's new reserve currency because it is simply too rare and too expensive to ship around and store.  Simply put, you cannot move it around through the Internet as you can with cash bank balances.  But, it can take a big role in backing a new substitute reserve currency, something the US began to unwind in the 70s when they first refused to exchange their own gold for their own dollars and then did the same for requests to exchange silver for dollars.

This is a long movie which ends with the USD losing sole world reserve currency status.  This loss as world reserve currency will occur in slow motion -- like maple syrup dripping from a tree.  (The choice of a slow-leak metaphor is intentional.)  

But, it could also occur like a falling urn hitting the floor.  Events like PIMCO stepping aside are significant.  Events like A Greek default and growing worry about Italy, Spain, etc are significant.

But, this is a long shot.  This situation should unravel in fits and starts.....a "step function" in math.  One large currency (like the Yen earlier this year) may fall 10-12% in 2-3 weeks.  The gold/USD exchange rate could rise 10% in less than 30 days.  (We better get used to that term "gold/USD exchange rate" and stop using "the price of gold" in conversation.)  Then, oil could rise unexpectedly to $130 per barrel in a few days.  Oil and gold prices are linked loosely because no oil producer wants to sell oil and then hold the USD for long; they would quickly exchange it for gold in a world of a falling dollar - thereby making the sale of that oil an oil/gold exchange.  Then, another currency crisis in a small currency like Greece or Spain could force world reserve banks to step in to bolster it because most currencies rely too much on one another and each country's currency agency doesn't want sudden shifts in any meaningful currency exchange rate.  (These events have already occurred a number of times.)

But, then we have the potential problem of a "Commercial Signal Failure".  The process of loss of USD Reserve Status can be speeded up by too many of the above possible events developing at the same time.  Some oil sellers could decide to stop selling future production for a while because they are tired of committing to sell their 90-day-out or 180-day-out oil production in USD-denominated contracts and then seeing that decision losing them 10% before delivery and payment.  OR, they could merely stop selling future production entirely and only sell spot contracts.  OR, they could get a bill for wheat or corn for their citizenry at 30% above wheat prices last year and say, "where am I going to get the money for this?" and knowing that their oil is the answer.

Or, a seller of gold or silver could presell too much of his production (a condition called short selling secured by future production) and they could experience the equivalent of a margin call from their account holder due to the value of their short positions rising too far.....which causes short sellers to buy back some of their short position and now you have too many buyers for a dwindling supply and amid upward price pressure.  All of these events could be called a "Commercial Signal Failure" and could result in a sudden shift of gold's exchange rate with paper currency.

There is simply an extremely finite supply of gold in the world.  And, it is miniscule when compared to all the paper currency floating around.  U.S pension funds have $11.6 Trillion in holdings, a large portion of which are currency substitutes like bonds.  Only 0.15% of that is in gold holdings (including gold miners).  U.S. money market funds are $2.8 Trillion in size and all gold ETF holdings are less then $120 billion, less than 3.3% the size of the money market.  Only 0.7% of all stock accounts in the US are into gold or gold miners.

It is not too difficult to see a situation developing where the balance between paper money holders (including all paper substitutes like bonds and money market instruments, etc) and PM money holders gets "rebalanced" suddenly and the supply of physical gold, silver, platinum, etc is either priced way up or it may become unavailable..... a condition where everyone who owns it wants to continue to own it (even in the face of a much higher price or violent price corrections). 

This rebalancing of supplies of gold and pricing of gold can be ignited when a very small portion of the holders of pensions or stock accounts decides to turn a very small portion of what they consider to be their "liquid" assets into a PM asset -- the substitute liquid asset of the University of Texas decided to do with $1 Billion of its endowment funds in April.  HERE.

Some are predicting that by 2012-2015, there could be no gold available for purchase for periods of time on the world market. 

Thomas Gresham's law restated: 
"Bad currency will drive good currency out of circulation." 

At the very least, gold could soon become a very difficult asset to buy -- unless the value rises significantly from here.   Gold can be acquired easily by buying any of the ETFs, like GLD or by buying gold in the ground with the miners through GDX or GDXJ.

Disclosure: I am long DIG, GLD.

Additional disclosure: Long physical gold.