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Minyan Mailbag: Dollars, Gold and Credit Correction




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Professor Succo,

In the last few months the dollar and gold have been rallying together. Much has been made about gold rallying in all currencies, an ingredient for a true bull market in gold. Maybe the rally in gold/xau/hui in the past two months is anticipating a weaker dollar down the road, but maybe it's also discounting a bear market in equities as well or your big picture stuff happening sooner rather than later.

Minyan Frank

I think you are on the right track. And that track is important in understanding what is going on.

Gold is rallying against every currency as a function of a coordinated effort by several central banks that are printing money. It is almost like the Fed calling the BOJ every night and checking on how much each has printed. Central banks are desperate to reflate and keep deflation at bay. Of course all this printing does is raise the price of real assets like gold and silver, other commodities like oil and copper, real estate, and even stocks. Bonds are in their own little world: they should be worried about all this printing, but right now are just as worried about deflation and therefore the liquidity is supporting prices.

In the end I do not believe all this printing will save the situation and is only delaying the inevitable: a credit correction. That correction will be nastier the more central banks try to delay it.

Ironically, the dollar is a little stronger therefore now relative to other currencies because so much of the world's debt is denominated in dollars. As our short term interest rates rise, it puts more pressure on debt holders to re-pay and they need dollars to do this.

I believe this is only a temporary phenomenon. The dollar will weaken dramatically sometime in the future once future demand for our debt wanes.

Prof. Succo

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