Increasing Concerns of Dollar and International Monetary Crisis
-- Posted Friday, 15 October 2010 | | Source: GoldSeek.com
Gold Gold climbed to a record for a second day yesterday and silver extended its rally to a 30-year high as the dollar continued to fall in international markets. Competitive currency devaluations and talk of “currency wars” is leading to concerns about the dollar and indeed concerns of an international monetary crisis. Gold remains near record nominal highs ahead of a speech Friday by Federal Reserve Chairman Ben Bernanke that could give more details of new action to stimulate the U.S. economy. Bernanke may indicate that the Federal Reserve will ease monetary policy even further. Should this happen gold could reach the round figure of $1,400/oz today or early next week.
The monthly U.S. trade deficit surged in August, fueled by a record gap in trade with China and a weak overall showing for American exports. The trade deficit widened more than forecast to $46.3 billion and the increasing politically sensitive trade deficit with China widened to a record $28 billion. The trade deficit figures suggest that the dollar remains overvalued versus many emerging market and Asian currencies and will continue to come under pressure.
Technically, the dollar looks very vulnerable and it could fall to support at 74.2 on the US Dollar Index (see chart above). Below that support is at 71.8 and given the scale of the fiscal and monetary challenges facing the US, this level of support will likely be tested in the coming weeks.
However, the problem is other western nations and their currencies face similar challenges. Thus they will all likely fall in value versus the finite currency that is gold in the coming months.
Silver Silver surged to new 30 year record highs yesterday. It looks set to challenge the $25/oz level after which we could see a pullback due to the sharp gains seen in recent weeks. However, there remains a possibility of a short squeeze where the concentrated short positions of a few Wall Street banks incur significant losses. They may then be compelled to close their short positions thereby leading to further sharp increases in the silver price.
Recently we saw short squeezes in the coffee and sugar markets and there are risks that a similar short squeeze could develop in the gold and silver markets. Particularly if larger participants decide to take delivery of bullion. The physical gold and silver market remain very small when compared to their respective futures market and even a small trend towards larger players taking delivery of their bullion from the COMEX could lead to sharply higher prices.
U.S. Commodity Futures Trading Commission ( CFTC) member Bart Chilton recently reiterated that the public deserves answers about the commission's extremely long investigation of manipulation in the silver market. They have been investigating very large concentrated short positions by some Wall Street banks due to long standing allegations by GATA and others of manipulation and suppression of silver prices. Chilton said last week that if the commission doesn't offer some answers soon, he'll speak out himself.
Silver's industrial uses should mean that the gold/silver ratio will likely gradually regress to the average in the last 100 hundred years which is around 45:1. If the tiny silver market was to see real funds enter it than the ratio could return closer to the historical average of 15:1. It did this as recently as in 1968 and in 1980. This could result in silver surpassing its 1980 nominal high at $50/oz particularly were a short squeeze to develop and the concentrated short positions forced to close their substantial short positions. Indeed, should silver go parabolic again it could rise to over $130/oz which is its inflation adjusted high of 1980.
Importantly, $50/oz was the record nominal high and would equate to around $130/oz in today’s dollars. The Hunt Brothers were not “special circumstances” per se rather large speculative interests. Today there are hundreds of potential Hunt Brother type silver scenarios where speculative interests such as hedge funds or even sovereign governments (some competing geopolitically with the US) attempt to corner the silver market. In other words a Hunt Brothers scenario could happen again, particularly if those attempting to corner the market do so by taking delivery of large amounts of physical silver.
WINNERS MoneyMate and Investor Magazine Financial Analysts 2006
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