I got a question from a friend today and I thought I’d share it with you here on my blog:
Question: The value of the dollar has gone up recently and it seems to be holding steady. Why is that so?
My short answer is this:
First, the derivatives and equities markets are highly leveraged. This means that fund managers borrow cash, with stock or other assets as collateral, to buy even more stock.
The more they borrow the worse their credit rating gets and the more interest they have to pay on their loans, their “leverage”. How do they get a better credit rating? They call AIG and purchase a “credit default swap”, insurance from defaulting on loans, and they borrow even more…
Now, when the value of the stock invested fall, they get a “margin call” from the bank or institution that provided the borrowed cash. This means that the fund manager by contract is forced to sell.
The loan for the cash is taken in USD, but the stock bought with the cash is often purchased on a stock exchange outside the US in the currency of that market. When the stock is sold, due to the margin call, this sale is also done in the local currency. But since the loan is denominated in USD the fund manager first have to sell the local currency and buy back USD to pay back the loan to the issuing institution (paying back the loan is called “deleveraging”). This creates a temporary demand for USD which causes it to go up compared to the local currency.
Also, the second point to be made is that US government bonds are considered to be a “safe haven” in times of turmoil. This is because the USD is still the preferred reserve currency of central banks. This is about to change as inflation kicks in due to the expansion in the money supply and the mega borrowing from the Fed. When the deleveraging is over, and the central banks around the world realize that the USD is no longer a safe haven, the USD will drop like a stone – game over. The other currencies will then shortly after collapse as well. Only gold and silver will preserve your purchasing power at that point.
In late 2009/2010 the USD has been rising again. This is caused by the massive short on the Euro in connection to the crisis in Greece. The financial industry will hammer the Euro, Sterling and eventually the USD again. Remember, all fiat paper will go down to its true value Zero. It’s not how high gold will go, it’s how low paper will fall.
Adrian Douglas of GATA.org just released an incredibly well researched article on the current inventory levels of the COMEX for both gold and silver. According to his paper gold inventory levels have decreased by 41% for gold and 24% for silver in just 6 months! At current reported inventory levels the COMEX will default on delivery of physical metal in 8,5 months for gold and 18,8 months for silver!
At no time in history has it been this important to own physical metal in your own possession and not paper promises. Gold and silver are money. The only real money that are no-one else’s liability. When the COMEX goes bust gold and silver will head for the moon and beyond.
The article concludes:
Investors should make sure they own physical bullion and not a paper substitute. When the music stops, and it looks like it could be soon, paper promises will not be honored with bullion. When a shortage becomes obvious to investors the price of bullion will be multiples of its current price. But those holding paper promises will not benefit. At best they will be paid in fiat currency and probably after months or years of legal wrangles, and most likely at the price on the day of default, not at the price on the day of settlement. Why accept anything but physical bullion?
The Chinese continue to move out of the US fiat paper currency and into real money, gold. India purchased 200 tones last year. As the saying goes “he who owns the gold makes the rules” this furthers the process already in the making for decades - the financial center of the world will move from the US to China and Asia. http://english.pravda.ru/business/finance/25-02-2010/112369-china_gold-0
Wherever we look at the world economy today, we see a wall of risk…and potential financial catastrophe. We see a large number of virtually bankrupt major sovereign states (US, UK, Spain, Italy, Greece, Japan and many more) teetering atop a financial system that is bankrupt, but is temporarily kept alive with phony valuations and unlimited money printing. Increasingly, therefore, investors will want to exchange this funny money for gold.
A smart investor with influence spreads one rumor and does the opposite - that’s how markets are played. Like when Nathan Mayer Rothschild took control of the London Stock Exchange in 1815 when he had prior knowledge of the defeat of Napoleon. Here is Max Keiser on George Soros now infamouse statement that “Gold is the ultimate bubble”. Soros has since that statement at Davos doubled his gold holdings.
Great interview with Marc Faber. FT.com really lets Faber talk in this 4-part interview giving him the chance to go into more depth than he is usually allowed to in F-TV interviews. Video on FT.com
Gold has reached a new high in terms of Euros. Or, to put it more correctly: The Euros purchasing power falls to a new record low in terms of gold. Remember, gold is not rising, fiat paper currencies are falling.
James Turk puts it this way:
Here’s my point. We live in a world of floating currencies that bob up-and-down against each other as a consequence of what central banks in each country might be doing at any given time. But all national currencies are sinking against gold.
Here is a good summery of the financial collapse. This TED-talk is held in Tallinn, Estonia, by Alar Tamming. He is the Chairman of the Supervisory Board at Tavid/Tavex, a gold bullion dealer operating in Estonia, Latvia, Finland and Sweden. He is also an Estonian and he should know a thing or two about what happens when fractional reserve banking runs amok. The crisis in Estonia, caused by wreck-less lending by Swedish banks, is far worse than in many other countries in Europe. Personally, as my readers know, I keep as little of my money as I can in fiat paper and on deposit at the bank, and as much as I can in real money - gold. As a customer at Tavid/Tavex I can recommend them for all your gold bullion needs.
Johnny Mellgren is a Swedish entrepreneur with a keen interest in macro economics and macro politics. This is his web site where he blogs about the economic collapse of our time, what to do about it and the economic future we create together. Contact Johnny Mellgren.
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I provide advice on investment portfolios for private and corporate clients. I also hold lectures in the history of money and the current economic collapse and how to protect your wealth in a time of transition.
