Friday, January 29, 2010

Dollar Gains, Gold Falls--Can a Chimera Last Forever?

A couple of weeks ago I blogged that my coin flip test confirmed that the dollar was in a strengthening trend and gold in a weakening trend, and it seems that the coin (it was a 1982 penny) was right. Kitco's Jon Nadler notes (gold closed at $1,080 per ounce today):

"The final session of the final January trading day in New York opened with a $1.50 loss in the yellow metal, which was quoted at $1083.90 per ounce. Gold traded in a band of from $1078 to $1088 overnight, as few additional physical buyers (other than pre-Chinese New Year buyers) emerged to take advantage of yesterday’s further significant dip. Today’s GDP numbers may yet aim gold back towards yesterday’s lows."

Nadler adduces a chart that shows that gold supply exceeds demand this year by the largest amount in three years. He quotes bearish sentiment on gold at and adds:

"George Soros said yesterday that despite the current headline-making woes that Greece is experiencing, he expects the country to get its act together and not collapse in terms of debt. He referenced a six-month turnaround by Hungary some time ago as an example of how a comeback can be achieved. That said, Mr. Soros also mentioned the fact that Germany is in no mood to pump money into the direction of what it sees as ‘profligate spenders in the southern parts of Europe.”

He also notes that Soros has said that he believes that there is a risk of a gold bubble because of low interest rates. But of course, monetary expansion causes both low interest rates and gold speculation. No great insight there. Nadler mentions $1,030 as a possible low-end targeting. As well, he quotes Bloomberg:

"Commodities headed for the biggest monthly drop in 13 months on concern that demand may wane as governments seek to control economic growth."

In the short run, traders like Soros and, more generally, Wall Street hedge funds, are likely to support the dollar. This will also be true if there is any kind of bad economic news.

But what are we seeing in Washington? Ever increasing deficits and insanity. If someone tells you they're a Democrat, send them to a psychiatrist.

This is hard to take. Short term, the dollar looks buoyant. Long term, there could be a breakdown in the dollar that could happen quickly. Prices of gold and stocks go up with monetary expansion. The world's monetary system is unstable unless everyone inflates along with the US, which has already expanded its potential money supply three-fold. So no currency seems safe, including the dollar.

So far, the international financial system has supported the dollar. But how long can a chimera last?

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