How about the gold market? Nature’s currency, gold, fell over US$27 in New York trading and is back under US$800 at US$787.30. Uh oh. What gives?
Another point we made last night is to underscore the fundamental structural change in the currency markets. The US dollar has fallen…and it cannot get up. There will be rallies. But even if the dollar rallies against the euro, so what?
The euro is also garbage, we pointed out. It’s simply another currency not backed by anything tangible. It’s risen by virtue of the fact that it is not the US dollar. But it too, is un-backed paper liability. And it’s not even backed by a real country! It’s backed by 12 member nations whose various economic fortunes may one day force them to abandon the common currency in order to set interest rates that are more appropriate than those set in Brussels. Europe has a North-South divide.
But back to gold. In a world of paper money relativity, gold is a physical absolute. That is why people have been treating it as money for thousands of years. That alone makes it compelling. But as we said, the bear market in the US dollar is a terminal bear market.
The US government will either have to greatly devalue the currency to pay off its debts, or default on those debts. Neither is good for confidence in the currency. In the meantime, things priced in dollars (commodities) will continue to go up as the supply of dollars increases faster than the supply of tangible goods.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Coffee Addict on 16 November 2007:
Is the growth in EU money supply significantly greater than long term economic growth trends within Europe?
Comment by Darius on 19 November 2007:
Dan, owning gold (physical or stock) is either an overly-fearful hedge against a catastrophic collapse of all the worlds major currencies, including the JPY, CNY, EUR, GBP and USD (assuming the country you live in has deep exposure to any of those). Or, it is just a short term play to capitalise on the fears of those hedging against some hypothetical currency catastrophy. Before your article can have any meaning you would have to detail and justify why you believe there will be a currency catastrophy. It seems quite clear that there is a transition occuring, away from USD, but will USD experience catastrophic collapse or gradual decline over decades??? There would have to be a natural disaster on a global scale for all major currencies to be catstrophic effected. Only then would long term gold be able to outperform the major markets, and then only until markets recovered (meanwhile, who would buy your gold for $10K per ounce?). Please tell us why you think there is going to be a currency catastropy. Thanks, D.
Comment by Reckoning_Fan on 19 November 2007:
I agree with what Darius said and belive much of the most recent gains in the gold price are due to "short term play to capitalise on the fears of those hedging against some hypothetical currency catastrophy".
Is it correct to assume that a 'currency catastrophy' would be coupled with an economic catastrophy? And if so, and things get really bad, will gold in reality be such a good thing to have spent all your money on?
Comment by RISHABH on 19 November 2007:
$ DOWN , GOLD UP , U.S ECONOMY IN SHAMBLES , BLAH BLAH BLAH...ITS JUST A PHASE. A YEAR LATER IT COULD BE A DIFFERENT STORY. ITS A TRAP. THE $ WILL GAIN STRENGTH AFTER SOMETIME AND DRIVE A LOT OF RICH BULLS OUT OF THE MARKET.
Comment by slimer on 20 November 2007:
(meanwhile, who would buy your gold for $10K per ounce?). Certainly not any of you guys. Gold only preserves wealth it does not make wealth. Do you really believe that 800 cotton dollars (backed by nothing)represents the true value of 1oz of gold??? You guys must be bankers!
Comment by Ted on 25 November 2007:
Devaluation or default? There are more ways to play it than that. If the Int'l Bankers don't want to destroy the global currency scheme, they need to keep current beliefs in GDP based fiat alive. That means restoring relative values to pre-Neocon idiocy. That can be done by protectionism in trade and heavy progressive taxation. As Nathan Rothschild said in 1917 when it looked like the UK and France would lose WWI, "Tax the rich and tax them hard." The answer to whether or not the destruction of the fiat dollar system or the destruction of America is favorable to the international finance mindset will be determined by whether or not America uses taxes that are targeted at the rich to rebalance the ledgers.