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The U.S. Dollar Is Monopoly Money

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Gold $467 Silver $7.30 Tuesday 20 September, 6pm Sydney

G'day! Whilst the recent action in gold (and lately silver) has been encouraging for us long suffering precious metals bulls, yesterday's lower close of many of the equities has me a little concerned. Sure they've had a great run in the last few weeks but the Amex Gold Bugs Index (HUI) is still significantly lower than the levels seen last year with gold LOWER than current levels. The equities have been lead indicator for gold the past 4 or so years and maybe the late sell-off is a "tell" that we may be in for a dip in the "paper metal market." A month ago, $420 was a gimme. Lift to $440 now, with maybe a short term dip sub-there, but unsustainable, IMO.

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Oil concerns have been around for longer than the last week! Speaking of oil, are oil traders now just weather watchers? It appears so to me. I know that Hong Kong Long had a great bit of weather input before Katrina which helped his institution clean-up on the back of Katrina. Hmmm. Paper oil, anyone?

Gold has risen in every currency recently. We have been waiting for such to occur and are pleased. This gold price rise is NOT a dollar issue, as I have monotonously droned on about. Yes, it is more about inflationary concerns and "paper money" and maybe Katrina was the tipping point whereby the creditors to the U.S. have realized the depth of the problems. It wouldn't surprise me to hear that one or two have said, "hang on a sec, where the bloody hell is all this money coming from to rebuild the South, fight wars around the world, secure the homeland, agricultural subsidies, tax cuts, fund the growing social security/pension liabilities, bail out airlines...blah blah blah...." It appears that the rotors are turning on Big Ben's whirlybird.

Lisa and I were watching Bloomberg TV yesterday when some Senator was on from down in Tennessee or somewhere, and he was saying that America has to be cautious how it spends relief money, plus war money etc., and that this is real money we're talking about, not monopoly money. We both looked at each other and had a giggle. Lisa has had her ears open these past 3 or 4 years. "The U.S. dollar is not monopoly money..." I beg to differ. There is no difference, just perception. Think about it. The only reason the U.S. dollar is any different than monopoly money is that the U.S. government says so. People accept U.S. dollar bills rather than monopoly money because they "think" and are "told" it is "real money." They are both just printed pieces of paper that burn and crush, fade and die out in the elements, unbacked by any tangible or real asset (except if you count the U.S. Government's ability to tax). The dollar has liabilities of over 4 times the total value of the country and everything in it. Monopoly money looks about as attractive as a current U.S. dollar to me. Gold and silver, on the other hand, are real money.

Technically, gold needs to head through the 1988 high at $490 and then should be off to the races as more and more attention is given. The general public and most investors have no idea about gold but when they wake up, watch out. I think we'll take a breather around $470 and I doubt we will head that high ($490) without a pullback into the 50s. Although, we live in very interesting times so nothing should be discounted outright. I would like to see some consolidation for a month or so above $450 so as to build the platform for another inevitable $50 or $60 launch higher. There will be some very, very scary pullbacks, like in silver recently, so be alert but not scared! Always re-check your analysis, any variables that may have changed, check the technicals and, finally, check the physical market condition. If your recently tested analysis points to no fundamental outlook change, then, just change your undies and BUY!

The Indian's have slowed purchases of physical metal on this sharp rise, notably due to Rupee weakness, but any Rupee strength should see a resumption of their aggressive purchasing. Everywhere one looks these days there is someone telling us about large increases in physical buying. GFMS reported a 20% increase in purchases in the UAE. The Arabs have and are continuing to sell oil and buy gold. I look forward to seeing Turkey's latest numbers as they are the gateway to the Middle East as far as physical metals go.

I read an article somewhere yesterday that some clown was talking that once the price gets up to $470 or so there will be "less demand and more supply." What a crock! The article referred to jewelry as the main reason the price has gone up. Let's look at demand first. Demand is increasing as the wealth effect in India, China and the rest of Asia allows these traditional buyers and hoarders of gold to continue buying even with a rising price. The Indian stock market is at record highs, China recently legalized the private ownership of gold, Vietnam and Thailand have seen large increases in their consumption, and it is not just jewelry. Gold chain at spot plus 1 or 2% is as good as bullion to these consumers, especially as they don't take 9 or 14 carat rubbish but high-end 22 or 24 carat stuff. Supply is inelastic due to the amount of time it takes to get a "new" source of gold up and running. Mines take years to find and build so his "increase supply" statement is patently misguided. There hasn't been a significant, economically viable resource find in years, let alone a big 10 million ouncer. The easy stuff has been found and it will only get more expensive to find precious metals. Sure, we'll see Central Bank sales and all that but we are also seeing Central Banks on the bid for the first time in who knows how long. Argentina is a good example.

I read a Globe and Mail article on Barrick (ABX) yesterday. There were some interesting points in the article but what caught my attention was the discussion regarding "hedge book reduction." I would never be so bold as to say that these guys plain outright lied, but it appears they may have been a little light on the truth. GFMS recently revealed a list of "de-hedgers" and Barrick wasn't in the top 10 by number of ounces! As the biggest hedger in the world, one would expect that they would surely be up there on that list. The Mark to market of its hedge book must be giving some credit officers at a few financial institutions a bit of stress. It's in the hole for more than a few billion bucks. As previously mentioned, I just don't get involved with companies who hedge the price without total upside participation. That means that they buy plain vanilla Put Options and pay the premium to do so!

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It has been interesting to watch the media and listen to how everyone in the financial world knows all about gold and the who-to's and where-for's. Scary. They still don't get it, but hey, any press is good press when it comes to the metals. I'm not concerned yet that the trade is getting too popular yet as this is such a small market that we could easily see more assets shift this way. The Indians are pausing here, but recent history suggests the paper gold market can run 10-15% higher than the "physical market". Hmm.

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Silver is just silver and when she decides she wants to have a go, she does. A 5% price increase in 2 days is pretty impressive but we should be mindful of how fast she has "spat the dummy" previously. Suggest that 7.20 will provide very good support on pullbacks and 7.50-ish will be tough to crack, although through that level we should be bashing the door of $8 in quick time. Not advice. The silver/oil trade is still the best around, IMO and not advice.

The HUI is lagging the XAU at present, but a few old faves have had a good time of late such as Golden Star Resources (GSS), DRDGOLD Limited (DROOY), Goldcorp (GG), Kinross Gold (KGC) and Newmont Mining (NEM). I did take a little profit on some exposures last Friday, which proved to be my typical "premature speculation." but I am comfy with where I stand today. Will be looking to reinstate the positions pretty quickly on the anticipated dip.



...The past week with the kids was a great one. Perfect weather to do all the things we wanted to, and more. We finally put them on the plane to go and live up in Brisbane on Saturday afternoon, which was not a very pleasant experience for us (my folks also came out to the airport which was nice and very much appreciated). The kids were blissfully unaware that anyone could be anything other than happy and excited to be going somewhere new to live, new schools and all that. We all just bit our lips and smiled. After seeing them through security, we all headed back to our apartment for a very, very serious little drink (or 50). Mum, a Scotch and dry drinker from way back, is now a Grey Goose and Cran convert.

The mares have both had their foals and we got a colt and a filly. Exactly what we were looking for. Ski Lodge has already been back to the shagging shed and we are waiting on her first pregnancy scan in 10 more days. She went to an Irish-bred stallion called Tobougg, who matches up nicely on the pedigrees (3x Secretariat, Habitat, and Northern Dancer, 2x Tudor Melody) .I'm not sure that he will throw horses that will suit our racing conditions down here, but you never know with anything that requires a feed! He's going to be put through a sale ring in 16 months or so.

Alinghi must be due to race again in the USA/CAD sometime soon. I'd still prefer her to be running 6-8 furlongs but apparently her trainer knows his horses, so who am I to say anything. Vouvray, Jactris's ¾ sister is due to race again in another week or so. She has already qualified for the $5 million Melbourne Cup and is currently one of the favorites.

Our little home-bred filly, Maitrise (Commands-Kirkstall Lane) is currently preparing for her first race and her trainer, John Hawkes, is very happy with her. She will race in about 5 weeks. Her dad, Commands, is the first stallion to have sired winners of over $1 million prize money here in Australia this season, ahead of Danehill, Redoutes Choice, Fusaichi Pegasus etc,. etc. This racing season is only 5 weeks old and Jactris' yearling colt is by him and due for sales early next year. Hmmm.

Enjoy the day and be careful.

Laurie.

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