Investing in precious metals 101

Tag Archives: reserve currency

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    Why Gold & the Dollar May Both Rise from Here

    An important possibility to consider
    by charleshughsmith

    Tuesday, November 13, 2012, 3:05 PM

    13

    Executive Summary

    • Triffin's Paradox leads to four principal conclusions that indicate why the U.S. dollar may well continue to strengthen from here
    • Why the euro's troubles have been good for the price of gold
    • Why the dollar can strengthen despite the United States' wishes
    • Why the future may well see the price of both gold and the U.S. dollar rise

    If you have not yet read Part I: Gold & the Dollar are Less Correlated then Everyone Thinks, available free to all readers, please click here to read it first.

    In Part I, we examined the commonly offered correlations between the dollar, gold, interest rates, and the monetary base, and found no consistent correlations between any of these and the domestic economy.  Clearly, the trade-weighted value of the dollar and the value of gold have at best marginal impact on the domestic economy. 

    Perhaps the dollar’s primary impact is on the international economy, as suggested by Triffin’s Paradox, which begins with the premise that the needs of the global trading community are different from the needs of domestic policy makers.

    Prior to 1971, the dollar was backed by gold, which acted as a supra-national anchor to the dollar's reserve status.  As the U.S. monetary base expanded while gold remained artificially pegged at $35 an ounce, roughly half of America’s gold reserves were shipped overseas before the policy was jettisoned.

    Here is the Wikipedia entry on Triffin’s Paradox:

    The Triffin paradox is a theory that when a national currency also serves as an international reserve currency, there could be conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country whose currency foreign nations wish to hold (the global reserve currency) must be willing to supply the world with an extra supply of its currency to fulfill world demand for this 'reserve' currency (foreign exchange reserves) and thus cause a trade deficit. (emphasis added)

    The use of a national currency (i.e. the U.S. dollar) as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars in to the United States. Net currency inflows and outflows cannot both happen at once.

    This leads to some startling conclusions that many have great difficulty accepting…

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  • Blog

    Eric Sprott – Paper Markets Are A Joke: Prepare for Bullion Prices to Go Supernova

    by Adam Taggart

    Tuesday, July 5, 2011, 9:49 PM

    0

    “I think that the prices will continue higher. I mean the amount of money printing is unbelievable. I just think you have to take that initial stand in terms of buying it. I use the James Turk analogy: just keep dollar averaging. We have gone up eleven years in a row, this year it looks like it will be no exception; I would certainly think next year will be no exception. If we ever have QE3 announced, I think gold and silver will just go absolutely bonkers here. And so I just think you have got to step in there and own it; we’ve had these fears all the way along. You know, $400, and $500 and $700 and $800 dollar gold, everyone was afraid it was a one-time thing. I don’t think it is a one-time thing, I think it is a secular thing. It’s going to carry on for quite a while here until we find some resolution of these problems. And the resolution probably will be some form of default where people just have to expunge debts that cannot be repaid. So, you have got to be in some asset which will not be affected by that.”

    So predicts Eric Sprott, founder of Sprott Asset Management and famed investor. In this wide-ranging interview, he shares his insights on the precious metals markets – specifically what investors need to be aware of in terms of the way the markets are currently managed (maniuplated), the macro outlook for the economy (grim) and the true value of gold and silver (very underpriced; particularly silver).  

    Eric sees the current “extend and pretend” intervention by world governments and central banks to prop of a fundamentally flawed banking system, particualrly the vast money printing efforts of the past few years, as a ruse that is losing it’s influence. Once enough people ask “Why have your money in a bank earning nothing? Why not have it in something that might at least maintain its purchasing power?”, the captial flows into the precious metals will dwarf current levels, sending bullion prices much higher.

    Those interested in hearing Eric’s insights on:

    • why we’re in a global secular bear market for most assets classes
    • what the safest investment options are
    • how much precious metals exposure investors should have
    • the key factors that will drive PM prices much higher
    • the mindboggling supply shortage and manipulation within the silver market
    • why there may eventually be two prices for bullion: one for paper and (a much higher one) for physical & how high Eric thinks prices could go

    should click the play button below to listen to Chris’ interview with Eric Sprott (runtime 38m:01s):

    [swf file=”http://media.chrismartenson.com/audio/eric-sprott-2011-07-05.mp3″]

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  • Blog

    John Rubino: Get Ready For Accelerating Devaluation of All Fiat Currencies

    by Adam Taggart

    Saturday, May 21, 2011, 12:04 AM

    0

    “We are exporting our inflation to the rest of the world. We are forcing countries like Brazil and China to endure the pain that we should be enduring. Brazil’s interest rates are like 12% right now. China is doing something new every couple of days to scale back bank lending and consumer spending. They are countries where a big part of the population makes just a few dollars a day. Rising food and energy prices are devastating for these guys. They do not really control the global price of energy and food, yet they have to endure the pain of slowing their economies down and throwing people out of work. Have them have to spend more and more of their money on food and energy so we can keep on borrowing and growing.

    Clearly that is unsustainable. At some point these countries are going to say “No, we want our currencies to depreciate, too. We want to be able to continue to export to you.” So what we will end up with is sort of like what happened in the Depression. Everybody was trying to cut the value of their currencies at the same time. What that leads to, obviously, is global inflation, instead of just localized inflation where a few countries are debasing their currencies. You have got everybody doing it at once. That is because the US, with the world’s reserve currency, basically controls this process. We have chosen to decrease the value of the dollar dramatically over the next few years. That is going to force the rest of the world to do the same thing or endure an overvalued currency and recession. No elected politician can put up with that.

    So what’s out there? Maybe after a mini-recession or some kind of correction in the next year or two is another round — an even bigger round — of global inflation. Basically all the fiat currencies of the world start decreasing in value at an accelerating rate. At some point, the whole concept of fiat currency, of governments in charge of their own monetary printing presses is going to be discredited.”

    So states John Rubino, proprietor of DollarCollapse.com. In his eyes, the demise of the dollar and other world fiat currencies via inflation is now a sure bet. There is simply too much debt that needs to be repaid, and our political leaders are not going to willingly choose the short-term pain of austerity and/or default. Of course, the resulting collapse of our monetary system will be much more painful and destructive in the long run.

    Click the play button below to listen to Chris’ interview with John Rubino (runtime 45m:22s):

    [swf file=”http://media.chrismartenson.com/audio/john-rubino-2011-05-20.mp3″]

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  • Blog

    Breakout! – A Closer Look at Gold

    by Chris Martenson

    Monday, September 14, 2009, 11:09 AM

    0

    A new Martenson Report is ready for enrolled members.

    LinkBreakout! – A Closer Look At Gold

    A snippet (click on above link to see the full report):

    Executive Summary

    • Gold had the highest weekly close ever
    • UN calls dollar trading a “confidence game”
    • US fiscal deficit breaks all records, keeps accelerating
    • Brazil, Russia, India, & China (BRICs) have dollar concerns
    • China promotes owning gold to its citizens
    • Examining US dollar reserve currency status (again)

    Normally I like to switch up my analyses each week, but last week’s look at gold already needs some updating, due to a few important occurrences.  There was a blistering array of developments and cross currents this past week that make me suspect we may be entering a new inning of this game.

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