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More On Rising Dollar, Declining Gold

by: Larry MacDonald October 01, 2008    
Larry MacDonald

Larry MacDonald

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The price of gold has rebounded as the financial crisis drags on but the process of consolidating the weak with the strong is well advanced. How many more big names are left to implode and fuel further gains in the price of gold? The supply is dwindling it would seem.

Meanwhile, as the Financial Times of London reports, jewelry demand, comprising about 70% of gold end use, is tumbling. High prices and slowing economies are causing jewelry buyers to cut back. Also, scrap supplies are surging in response to higher prices.

Gold bugs anticipate galloping inflation from monetization of the government’s debt load, which is to be substantially increased by the requirement to rescue the financial sector. Admittedly, it’s possible the Fed may resort to the printing press but the forces of de-leveraging are way out front now, spreading ever stronger deflationary impulses. Expansion in the money supply won’t accelerate inflation when the economy is moving away from full employment.

Gold bugs anticipate a tumble in the U.S. dollar. Yet, government borrowing is destined to escalate because, as mentioned, of the imperative to rescue the financial sector; the higher borrowing in turn creates upward pressures on interest rates and, in turn, draws capital into the U.S. Besides, other currencies are not looking all that attractive either as the world economy sinks further into recession.

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This article has 32 comments:

  •  
    Oct 01 06:27 PM
    What you are forgetting is that inflation is nearly 14% already. See shadow stats.com
    Additionally the banks with the FEDs help have been driving the price of gold down so that the mom and pops will be forced to pay for the inflation tax. This cannot go on forever.
    Reply
  •  
    Oct 01 06:40 PM
    mv=pq,
    more m, given v/q constant, means only more p,
    we all know q is collapsing in the US
    because of (g - t) caused too much (m - x)
    as m-x was funded by b*
    now the foreign holders of b wants a lot more i
    you can get domestic b with a low i
    but as p is going to the moon,
    your i/p will go to hell if you not fix
    g - t = 0 with a very positive x-m
    Reply
  •  
    Oct 01 07:33 PM
    I don't believe inflation right now is anywhere near 14%. Housing prices down 20%, oil and nat gas plunging. Wages flat. Just doesn't make sense.
    Reply
  •  
    Oct 01 08:37 PM
    If Gold is so plenty full, why are premiums sky rocketing? Dealers in precious metals are currently paying over their normal retail prices to obtain anything physical. One ounce gold Krugerrands for example where selling for $5-$10 over spot about a month ago. Dealer bid prices are now + 40 and rising. ( See Coininfo.com Dealer bid Prices)
    GOT GOLD? Check with your local coin shop or precious metal dealers. You will find there's " Nothing available"
    Reply
  •  
    Oct 01 09:45 PM
    Agree. I ordered some gold from Kitco in August and am still waiting for delivery. It only said "booked" on their website. And if you call, the phone rings forever and wait time is long. Something is definitely up.
    Reply
  •  
    Oct 01 09:48 PM
    You are likely correct: gold is offset by the dollar rise, but only relative to the Euro and Pound etc., and the presses will not be needed in a deflation, as jobs decline faster than you can count. So what is the upshot? It not falling gold but a deflationary cycle that will extend dollars purchasing power, but price US exports out of the world market. We can not win for losing. I think the ice decade where things are in limbo and we grow wary of the sameness of life.
    Reply
  •  
    Oct 02 01:21 AM
    With roughly 7 trillion in deposits and only 4.5 trillion insured by FDIC, people are scrambling to find a quick safe haven for 2.5 trillion. Since most people are not gold savvy the obvious place to try and preserve this amount of wealth is not to find a hundred banks and buy CD's but to simply buy treasuries. This drives the dollar up and gold down. If the FDIC limit is raised to 250k it may curtail the rush into treasuries and the rise of the dollar. This would be gold positive me thinks.
    Reply
  •  
    Oct 02 01:47 AM
    it all depends of course. i think their will alot of fluctuations and even changes of directions. nothing is for certain.
    Reply
  •  
    Oct 02 05:49 AM
    Read between lines in the latest deveploments of the financial markets, I'm a Gold bug very long term but fundamentals and market intervention are changing the picture of the Gold price short term. As far as I'm concerned I'm selling all my Gold and then short a position in paper Gold today at 9:00 EDT and will double my short same time tomorrow and leave it until December. Reasons? With a strengthening USD, recent data showing that inflation is coming under control and the prospect that long term consequences of recent Government's measures on the money supply will not be seen inmediately plus the need for raising cash from pretty much every single investment house will have a profund effect in the Gold price. The overall picture doesn't seem to support Gold prices at this level, I'll probably place my stops very tight but I'm not going long anytime soon again before Christmas 2008. Think about data, the technical picture, resilience to break 919 (it was attacked 6 times in the last 2 weeks) despite funds buying and physical demand and the fact that those US banks shorting or selling Gold since July (it has a reason behind it) whether it is transparent or not, it is a fact. Remember? Buy the rumor, Sell the fact, well we all bought the rumor, I'm selling the fact!!
    Reply
  •  
    Oct 02 06:00 AM
    will the dollar rise as the same time as gold -I think yes and that is the more likely probability that the US dollar although stronger than foreign currency will still be seen as weak and gold prices will slowly climb to reflect it -
    Reply
  •  
    Oct 02 06:28 AM
    Come on you can't have the felling of a weak USD, it either is weak or is not and that drives Gold prices together with the expectacion for inflation both are not Gold supportive at this time the other 2 drivers, Hedge Fundsspeculation and physical demand are showing signs of exhaustation at the moment. Chinese's New Year is the only strong physical demand left seasonally speaking. What will drive Gold up next year is the huge increase in money supply and the second-round effect in inflation but if you buy Gold now, you may buying a very sad Chritsmas time unless you buy all cash then you can wait a couple of years to realize a decent profit.
    Reply
  •  
    Oct 02 08:02 AM
    Paulson's money will, among other things, be used to make whole the gold shorts on the Crimex, so they can short some more.

    The flood of dollars coming from the Fed will be mopped up with a flood of oil coming from SPR and Saudis. Dollar strength encourages people to buy Treasuries.

    Short term, it will work. Long term, not at all.
    Reply
  •  
    Oct 02 09:02 AM
    "scrap supplies are surging" quote your source !!!!
    Reply
  •  
    Oct 02 10:47 AM
    The dealers i work with either can't get silver for physical possesion or charging several dollars above spot to get it. Tell me that this market is not rigged and that prices are not being manipulated. This is not a free market, based on technicals or fundimentals. Why isn't the press reporting on the precious metals situation?
    Reply
  •  
    Oct 02 10:58 AM
    I can personally vouch for surging scrap supplies. A friend of mine buys scrap gold. He has been buying huge amounts from the public over the last several months.

    However, this past week he was told by the smelter he sells to that new government regulations will require an additional two day delay before the smelter can send him money for the gold he sends.

    Maybe gold smelters are suspected financial terrorists?

    Anyway, LOTS of people are discovering unwanted or broken jewelry and selling it to raise cash. While this does add gold to 'the system', it is still in the form of broken jewelry and scrap. It takes quite a bit of time and effort to turn this stuff into physical supply like coins or bars.

    The flip side is that most of the sellers need the extra cash to make ends meet, showing that things aren't all rosy in general.
    Reply
  •  
    Oct 02 11:24 AM
    To: coldcut

    Sorry to read you have been "taken" by Kitco. Posts here routinely inform readers to stay away from them and others that tell you up front you will get your stuff when they get around to it--maybe--. In addition, the wait is long, you can't cancel, because you will get hit with fees. They are, well, unscrupulous is one word. Others cant be printed here. The best source for gold and silver is your local shops, shows, and ebay. Just be careful that you are getting GENUINE stuff. Good luck!
    Reply
  •  
    Oct 02 12:00 PM
    Hey goldbugs! Just ask yourself - when was the last time real estate, stocks, and all real asset prices were falling while inflation was growing. There has never been falling real asset prices while inflation was rising. Falling real prices is caused by deflation - it is economics 101. Sure glad Mom and Dad paid for my economics degree - it will save me a bundle when the gold market collapses. Gold right now is held up by fear, not inflation. When the fear subsides, so will gold.
    Reply
  •  
    Oct 02 01:49 PM
    The never ending series of bailouts will set up Federal deficits at a trillion in the next FY and a geometric increase thereafter. This debt will have to be monetized by the Fed. There are no buyers for this quantity of Treasury bonds without further reducing the pool of available credit. Gold is a historic store of wealth recognized in all cultures for all time. Compare this fact to a spiraling out of control production of money by the Fed and how can gold not come out a winner?
    Reply
  •  
    Oct 02 02:00 PM
    So what is this so-called "article" saying? It looks like a midnight nightmare transcribed -- Hellucinatory.
    Reply
  •  
    Oct 02 07:06 PM
    Well as promised yesterday, I sold at 9:00 EDT and short at the very same level, stops went at breakeven. Second leg tomorrow 9:00 EDT. Gold at 700 by December, I'm looking at you, then I'm going to buy you old for 700 the as soon Inflation starts to pickup and stagnation takes a toll on what is left of the World's economy.
    Reply
  •  
    Oct 03 01:53 AM
    Good drama, Gold Bugs. Keep it up.
    Reply
  •  
    Oct 03 05:15 PM
    My bubble is different than your bubble and all previous bubbles because... even poorly covered debt is safe if the company is growing; technology is the future; house prices never go down; oil is a finite resource; I just choose to measure everything in my favorite asset so it is "safe" by definition.

    It is a bubble. All of them will burst. All were predicated on the belief that money is fake and hyperinflation inevitable. Money isn't fake, if it were houses would always be worth more than the mortgages on them. Hyperinflation isn't inevitable - the Fed didn't let M1 move an inch for 3 straight years, spring 2005 to spring 2008. There isn't more spendable money chasing the same goods. There is the same spendable money chasing goods bid up insanely to 3-5 times its usual price, in one bubble brainstorm asset after another. None of those insane prices stick. They call forth supply and they destroy demand.

    Gold is no different than fertilizer stocks or crude oil or houses in Phoenix or dotcoms. It was a momentum driven speculative plaything of ideologues with a storyline, who were trying to will their fantasy into reality by sheer chutzpa. And it will crash the same as all the others have crashed, and are crashing, and will crash again in the future.

    See, the thing about tulips is, you can plant one and get 100 cuttings next season and sell them all, ok for a bit less, but even if they fall by half you still make 50 times your money!

    Reply
  •  
    Oct 03 09:37 PM
    "Additionally the banks with the FEDs help have been driving the price of gold down so that the mom and pops will be forced to pay for the inflation tax"

    Gaucho, how would this manipulation force mom and pops to pay for the inflation tax? How would a freely rising gold price stop mom and pops from paying the inflation tax?
    Reply
  •  
    Oct 04 11:52 PM
    Carl Spackler, the economic major, if the value of all assets are deflating where do you think investors will park their money to ride out the storm?
    Reply
  •  
    Oct 05 07:20 AM
    Cesato
    I'm short Gold and Silver Futures but to sell your Physical Gold and Silver at this time is not wise as you could easily wake to find a "Banking Holiday" with all US Dollars cut in half so as to lower the US DEbt by half or perhaps even more. This would be akin to Nixon closing the Gold Window in 72 or Roosevelt seizing US Gold and then raising the price up to $35 an oz from below $20. Physical Gold & Silver are your portfolio's Currency Insurance. Would you cancel your Flood Insurance just because you made it to the Eye of the Hurricane? No , especially when it is becoming increasingly hard to find such insurance. The physical markets for Gold and Silver are over 90% sold out at this time. Nobody is selling at these prices they are only buying. All demand and no supply make it hard to acquire these assets. So it is a sellers market you may get a premium over the paper price but you could easily find you'll never reacquire in this price range.

    Play games with the paper, Hold on to your physical it may be all the life raft you have
    Reply
  •  
    Oct 05 11:51 AM
    "Carl Spackler, the economic major, if the value of all assets are deflating where do you think investors will park their money to ride out the storm? "

    In a deflationary environment, eveything drops except cash.
    Reply
  •  
    Oct 08 04:54 PM
    Where did they keep their money during the depression? They had no money dummies! What little they had they carried in their shoe. Hey Myrtle, don't you realize that in a depression people lose money. They have real losses. Translation - they have much less money and they do not really find value in anything.
    Reply
  •  
    Oct 09 04:47 PM
    "Where did they keep their money during the depression?"

    They who?

    "Hey Myrtle, don't you realize that in a depression people lose money"

    Yes, lots of unemployment, lots of losses. So what?

    "Translation - they have much less money and they do not really find value in anything"

    Inflation..money worth less.
    Deflation... money worth more.

    It's pretty basic.
    Reply
  •  
    Oct 15 09:47 AM
    So Myrtle,

    By your argument, everyone actually had more real purchasing power in the Depression? Wake up. Depression = loss of wealth. You lost all credibility with that one.
    Reply
  •  
    Oct 18 10:21 AM
    "By your argument, everyone actually had more real purchasing power in the Depression?"

    No, Spackler, by my argument, money was worth more during the Great Depression. You know what deflation is?

    Maybe you need a distionary?
    Reply
  •  
    Oct 18 10:22 AM
    *dictionary*
    Reply
  •  
    Oct 19 06:30 AM
    Spackler: maybe you should have studied history instead of economics. Gold has performed well in both periods of inflation and deflation.

    That's not to say it will do so in the future; every era has its own dynamics. Myrtle is right: currency wins purchasing power in a deflationary environment. Gold was currency during the Great Depression, and so it did great. During the 1970s we had inflation _ but gold was a commodity by then, and not currency, so it did great again.

    The question is what will gold do in the current environment, when there is deflation now but (debatably) inflation coming.

    The only thing you've said here of any relevance is:

    "Gold right now is held up by fear, not inflation." Well that's an opinion for which you should state your arguments. If mere assertion is all they taught you in school, your diploma isn't worth the paper it's printed on.
    Reply
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