Minyan Mailbag: Will Intervention Help Or Hurt Gold?
Weak dollar not the only reason for high-priced bling.
What if the Plunge Protection Team decides the dollar has taken too much heat and Federal Reserve Chairman Bernanke and Treasury Secretary Paulson start playing currency interventionists like they're playing the stock market?
I know you've written "watch what they do not what they say," but we're dealing with gigantic ego amateurs here. Word is buzzing around my futures network that intervention is up next. It would pound the metals for sure, but I think it would pound equities, too, thus defeating the jam-job they're going for.
Think they'll do it?
I actually think any attempt at intervention in the currency markets will rally gold in all fiat currencies. I've mentioned this in several articles over the past six months because in my opinion intervention is an inevitability.
In order to intervene, central banks will need to print massive amounts of currency to have any effect . After all, the dollar isn't just dropping for no reason. The asset inflation dependent U.S. economy is broken, as is the highly leveraged financial system. The Fed is being forced to aggressively ease just keep the financial system functioning, not to mention the near-monetization it's doing with these various "facilities." The natural result is a weak dollar given the massive current account deficit that the U.S. runs.
The U.S. has no foreign currency reserves to speak of with which to intervene, even it wanted to (I'm not so sure it does want to just yet). The only way the dollar is going to be supported is if other central banks debase their currencies in order to support it, or if the Fed tightens aggressively. And because of the fragility of the financial system right now, the odds of the Fed tightening any time soon is about as likely as Bear Stearns (BSC) receiving an $80 bid tomorrow. That leaves only foreign intervention.
Thus, if foreign central banks do resort to some sort of massive dollar-prop intervention, the result is likely going to be that all fiat money comes into question even more than it already has. This will benefit gold even more in all fiat currencies. Also, global inflation will likely accelerate even more.
Foreign central banks will no doubt try some sort of intervention eventually. It's just another of the many likely steps along the way in the breakdown of the fiat dollar-based monetary system that the globe has enjoyed since its defacto beginning in 1980 when Paul Volcker restored confidence in the fiat dollar. But as for when that intervention will occur, who knows?
Most seem to forget, but the last time the world's monetary system (Bretton Woods) broke down in the 1970s, the dollar index actually bottomed in 1978. For the remainder of the stagflationary period of 1978 -1980, the dollar index basically went sideways the entire time (see the chart below). Meanwhile, gold and inflation exploded during the entire period. Inflation wasn't finally put to bed and confidence restored in the dollar until Volcker came along in August of '79 and began to tighten aggressively.
Click to enlarge image
As I've said over and over again, gold's bull market is not just a weak dollar phenomenon. That's why it's rallying in all fiat currencies.
Don't assume that just because the DXY (dollar index) bounces, whether via short covering or due to intervention, gold is going to fall. We may see a short-term knee-jerk down, but the only thing that's going to take down gold and keep it down is a return of confidence in the financial system, the economy and in some sort of other currency - whether that's the dollar, yuan, or the euro. In the meantime, chaos reigns, and gold is a store of value and a refuge from that chaos.
Many want to call gold a bubble or a useless metal that will suddenly collapse because a piece of paper called the dollar is rigged to the upside by a bunch of central banks. These people don't understand how the global financial system works or gold's history as a monetary asset.
Is it any coincidence these same people didn't see the housing bust coming either? I suspect not
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