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Gold Breaks Out Big Guns


Rally exposes weakness in currencies.

I've been noting for a while that gold's rally is not just a weak dollar phenomenon. Along those same lines, note that spot gold is breaking out to new all-time highs in both euros and dollars today (see the charts below) .

Click to enlarge either chart

As expected, the ECB is hinting this morning that it might intervene to slow the euro's advance. This was always going to happen at some point, and it's also why gold is rallying all confetti currencies. At the end of the day, all central banks are going to turn to the printing press, which is also why the market is losing confidence in the fiat dollar-based monetary system.

Before I go any further though, I would invite everyone to read the following story of the implosion of Kuwait's Souk al-Manakh stock bubble back in the early 1980s. It's a good analogy for the situation we find ourselves in now. Similar to the credit bubble in the U.S., when this Kuwaiti market "failed," there were simply "no bids" and the market had to simply shut down. Everybody was a loser, both longs and shorts. In the end, the Kuwaiti government was forced to bail out the market to the tune of $91 billion, or $90,000 per each Kuwait man, woman, and child.

Our succession of bubbles (thanks to Alan Greenspan) eventually culminated in the largest housing bubble known to man , and now everybody is going to suffer due to its bursting. Like Souk al-Manakh, the U.S. financial system would similarly go "no bid" and seize up were the Fed not to continue to aggressively inflate and basically run the printing press at warp speed. The economy is too small to support the massive overhang of debt. Either the debt bubble must collapse and take the system with it (which would cause the markets to seize up and simply shut down), or the Fed must massively inflate in order to enlarge the economy to support all the debt. And given the Fed's interest in preserving the banking system, it's obviously chosen the inflationary path that we're on now, as it has repeatedly told us over and over again via the language of being more concerned about "growth" than "inflation." That's code for "we're going to inflate."

As I've said, it's not a matter of choice. The Fed must and will continue to inflate aggressively in order to keep the system simply functioning, perhaps even taking Fed Funds eventually to zero and/or buying financial assets on the open market and monetizing them? It's already doing that to some degree with the TAF.

And just like the Kuwaitis back in the early 1980s, everybody is going to suffer the consequences of the bust due to the inflation that is going to be the result of the Fed's actions, and not just those in the U.S. Because the dollar is the foundation of the world's monetary system, the whole planet is going to suffer those inflationary consequences. The monetary system basically breaks down, just as we are seeing now.

The fiat dollar-based monetary system that the world has enjoyed since 1980 when Volcker conquered inflation and made the fiat dollar the world's reserve currency is coming to a close. We are now embarking on another transition period in my view, much like the 1970s, which was a transition from the Bretton Woods system that ended when the U.S. closed the gold window to the fiat dollar system that was in essence given birth to by Volcker and that we've enjoyed for the past 28 years.

Is it any wonder that gold, the ultimate store of monetary value down through history, is making new all-time highs against all major fiat currencies at present?

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Position in gold, gold shares.

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