Wednesday, February 18, 2015

Gold and the Strong Dollar Illusion

The markets are a rigged game. Even Rolling Stone sportswriter Matt Taibbi's reporting explained that in clear language. The frustrating market is the gold market. It, along with the silver market, exhibit many signs of manipulation. It also seems stuck despite the money printing going on all over the world. Do not fret. Reality will assert itself. It always does. The train may be late, but I can hear it in the distance.

Complaining about gold having a stagnant year? Over the last year, gold started a little over $1300 an ounce and is now a little under $1300 an ounce. Unimpressive to gold holders. In the same timeframe, the US Dollar index has risen from 80 to 94. Gold has not been pummeled like other commodities despite the +/- 20% rally in the dollar. The dollar appearing to be the cleanest dirty shirt in the world is only going to last for so long. We are all still set up for a new QE, so one wonders where the new bubble or flood of dollars will go to. The last time the system feared a "Grexit", the price of gold shot up to all time highs nearly touching 2,000 an ounce. We are once again facing a Grexit or an ECB print fest. Why isn't the speculative bubble here?

The additional weird thing going on is the steady buying all around the world. Shanghai had seen a constant dozen tonnes of gold delivered every week. This changed a week ago, when Shanghai saw 23 tonnes delivered a day for the week. That level of deliveries was last seen in 2013. Monday and Tuesday saw over 50 tonnes delivered. Last year saw the highest level of gold purchasing by global central banks in 50 years at nearly 500 tonnes in total. There is one major caveat to that number, making it a floor. China is excluded from those numbers. If you think China is not buying any gold for their reserve stockpile, you are fooling yourself. Why isn't there a speculative bubble here?

The other head scratcher is the gold miner sector. Here's the set up. There is demand for the product from large buyers unseen since the '60s. There is a steady price despite a rise in the dollar. There is a huge drop in raw costs for producers with the drop in the price of oil. Their production costs are all lower now with a steady product cost. This should be a slam dunk. If anything, the Chinese should be snatching up Western mining firms (and undeveloped African properties) or their assets. Why isn't the speculative bubble here?

I'm a big believer in holding physical gold rather than using the GLD ETF. I recently found out a little fact about the GLD ETF that made me feel more secure about this approach. The GLD gold holdings are in a custodial vault. Who is the custodian? None other than HSBC. HSBC has been in the news recently for piddly little fines for money laundering for drug dealers and other shenanigans in our banking system. I have little faith in HSBC.


The real trick the financial-academic elite are playing is in boosting dollar strength to allow American dollars to suck up foreign assets cheaper. No QE, threats of raising rates (stop laughing), and chaos elsewhere pushes money into dollar financial assets. What is that dollar strength though? The BRICs are not acting like it is strong. The Russians used last month's crisis to drop over $8 billion in dollars. Convenient excuse for dumping. Zero Hedge reports today they have dumped 20% of their USD holdings, and China dumped dollars, too. Still, we're told the dollar is strong. Look at how the USDX weighting is set up (via La Wik's article).


  • Euro (EUR), 57.6% weight
  • Japanese yen (JPY) 13.6% weight
  • Pound sterling (GBP), 11.9% weight
  • Canadian dollar (CAD), 9.1% weight
  • Swedish krona (SEK), 4.2% weight
  • Swiss franc (CHF) 3.6% weight

  • That is roughly 70% of the USDX weighting against dead men walking currencies. That weighting is the weighting of an old order. A Euro disintegration would have replacement of the euro's 57.6% undoubtedly by pieces of the EU, but would the yuan, ruppe, real, ruble or other currencies find a way to sneak into the mix. Wouldn't the BRICs have a legitimate claim compared to post-euro destroyed European pieces? If they did, would the USDX be so high? What will take the yen's place when it crashes? Unknown, but there are Asian nations itching to take their place.

    That is the big trick though. Everyone is itching for a place at the table, making a new table or just breaking the current one. We will see who makes the first move.

    5 comments:

    Chris said...

    Glad you posted this. As someone who has been buying AU & it's little brother AG since 2008 ("Not good, Bob!") I realize that time is on our side. But it's hard not to fear what the central banks have been doing. Bob Wenzel calls the so called "market manipulation" a factor of the Plunge Protection Team that seeks to suppress the appearance of crisis. That seems as reasonable as any other explanation tbqh.

    Ron Paul has said that since AU is so far out of the reach of the common folk, if the SHTF, AG will be the one that is really set to fly. Either way, for someone looking to get into physical AU or AG, AG's price point is much easier to get into for a novice investor. I buy mine through APMEX.com and it's been easy - but there are literally a 1,000 ways to skin that cat. You're gonna pay a premium over spot, but bide your time and wait for sales, specifically on bars or "junk" silver, which is not junk per se, but rather sorted coins.

    You can even get gold in your IRA or Roth cheaply and easily though a fund like CEF, which is literally a warehouse full of gold of which you own a share of...at $12/share. As you mentioned, the asset price is screaming value. Take advantage.

    sykes.1 said...

    Gold is a hedge against currency collapse. But if that happens, you will need guns to protect your gold.

    Anyway, someone on one of the survivalist blogs pointed out that gold is too expensive for small trades, and in a barter economy .22 LR's are a better (and more useful) currency.

    nikcrit said...

    "Anyway, someone on one of the survivalist blogs pointed out that gold is too expensive for small trades, and in a barter economy .22 LR's are a better (and more useful) currency."

    Ahhh, yes; sage advice from the alt-right's security wing!

    Portlander said...

    This all-or-nothing between the greenback and guns/gold/barter is classic either-or fallacy.

    There's been countless currency devaluations over the last 100 yrs and considering the inherent wealth destruction that's taking place in the midst of such, they're quite orderly from a law and order standpoint.

    Also, while the GLD etf is a sham, there are other options: CEF as Chris mentioned, and PHYS is another.

    ETF's are a lot more scalable then coins in one's backyard, and you can own them within an IRA.

    罗臻 said...

    The U.S. dollar has experienced bull markets lasting roughly 6 years. USD peaked in 1985, bottoms in 1991, rally lasts from 1996 to 2002. USD peaks in 2002 and bottomed in 2008, rally begins in 2014. The buildup of malinvestment denominated in U.S. dollars needs to be exhausted before the dollar weakens again.