August 4, 2011
Vilnius, Lithuania
Here’s some food for thought that I’d like you to chew on for a bit.
The debt ceiling debacle has been settled… President Obama is celebrating his 50th birthday, no doubt dancing a little jig that a major crisis has been averted, and equity markets in the US have begun to move off multi-month lows.
Investors can safely say that the US will not default, and the rating agencies have even maintained America’s AAA credit rating, albeit with a warning that the US may be downgraded within the next two years. Yields on the Treasury’s benchmark 10-year note have fallen from 3% last week, to just 2.6% yesterday, and the Dollar Index is off its lows from earlier this week.
Here’s the question: with all of this good news and calm in the world of the dollar, why does the price of gold keep going up, 5 out of the last 8 sessions?
This may be the strongest indication yet that a major shift is taking place in the global financial system. I first started talking about this in December 2009 when I wrote:
“In a flight to safety, institutional money still flows into the dollar. Gold will not truly break out until there is a bifurcation in investors’ mentality regarding safety.
“To put it more clearly, when worried investors start piling into gold instead of the US dollar to protect their assets, this is the sign that we are charging towards the top.
“For now, it’s not happening yet, and that’s why I recommended going long gold against the euro…”
Gold has surged 50% since then, and it’s become quite clear that this ‘bifurcation’ I predicted has occurred. Gold is now viewed by the market as a safe haven asset, much safer than the financial system’s traditional safe haven– the US dollar.
Today, even when Treasury yields fall, the gold price surges. This is a dramatic departure from the core foundation of the financial system, and it’s clear that the market has less and less confidence in the stability of any fiat currency.
In the US, there are numerous indications that the fake recovery is stalling, and investors are beginning to expect Quantitative Easing 3 from the Federal Reserve… because, if at first you don’t succeed, keep trying the same thing over and over again.
Are there any alternatives?
The yen is often thrown around as a safe haven asset as institutions foolishly have confidence that the Japanese government, in debt over 200% of GDP, will make good on its obligations.
This morning, though, the Japanese government intervened directly in the foreign exchange market in a move to weaken the yen, and further announced that the Bank of Japan would expand its asset purchase program. More debt, more printing. The yen tumbled over 3% on the news.
Even the Swiss franc, widely seen as among the safest of all currencies, experienced a steep decline yesterday when the Swiss National Bank unexpectedly slashed rates to curb the franc’s appreciation. Investors pushed back vigorously against the SNB, increasing the likelihood that some form of capital controls may be coming soon.
Just eight days ago I predicted that the SNB would intervene to stem the rise of its currency, though even I didn’t expect it to happen so quickly. Things are definitely moving fast, and it’s clear that governments are willing to move mountains in order to keep the party going.
Look, there are some incredible opportunities out there in the world, and I’ve written about these extensively. But we cannot be blind to the tremendous risks to our assets and livelihoods. It’s imperative to first take steps to protect what we have in these chaotic times before government intervention destroys it all.
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