The big question is how long can the dollar last as the world’s reserve currency? Needless to say, that is not an easy question to answer. We recently called the top on the dollar at 89.50 on the USDX. The USDX is six currencies versus the dollar on a weighted basis. More than a year ago the dollar hit a low on the USDX at 71.18. A phenomenal rally ensued from that level expedited by de-leveraging and the closing out positions within the carry trade. A good example of the carry trade was when a bank in NYC borrowed yen. At ½% interest, sold the yen for dollars and bought dollar denominated securities.

All of that is now history as the dollar comes under increasing pressure. We believe the dollar could test 71.18 this year. We also believe the dollar could break down to 40 to 55 over the next few years. The collapse of the dollar is certain. The Treasury and the Fed have committed the American taxpayer to $13.8 trillion of debt and before the dollar goes where it is ultimately going that figure could reach $30 trillion.

In modern times such fiscal and monetary irresponsibility is unparalleled. This abdication of moral responsibility has already begun the process of dollar deterioration and rising interest rates. The result will soon be hyperinflation.

The collapse may be disastrous for all countries, but it is going to be equally disastrous for the corrupt who have brought us to this sad situation. Hopefully as painful as it will be it could create many new opportunities for some. One thing we see as certain is that the elitists will find themselves targets of civil and criminal charges and targets of contempt and derision. The new world order they so arrogantly and confidentially predicted with one world government will again have been a failure.

There is no question where China is headed in this currency war to dump the dollar. They continue to accumulate gold with the intention of having a gold backed currency - something America is, we believe, incapable of doing. Such an ongoing pressing event has to put continual downward pressure on the dollar. China is already by passing the dollar reserve system by settling in other currencies, using barter and through swap arrangements, major changes are in the process of taking place. We do not believe the yuan will be the reserve currency of the future. A better idea is to have a weighted basket of 10 major currencies as a world benchmark. China is heavily dependent on exports and as yet does not have domestic demand to relieve pressure when exports fall. They are also still a dictatorial, communist society in power by force. They also still have an enormous population and wages are still dreadful even though they have increased 10-fold over the past 15 years. Politically both China and the US face populations that are profoundly unhappy and if major changes are not made in both societies, both are ripe for revolution.

Wednesday’s 10-year Treasury auction wasn’t all it was cracked up to be. The yield was 3.99% with 46.8% allotted at the high bid. The bid/cover was 2.62 versus the average of the past ten auctions of 2.40. Indirect participation, of foreign central banks was 34.2% versus an average of the past ten auctions of 28.23%. The only reason the sale went well was that the note had to be lifted 13 bps to 3.99% in order to attract buyers. In addition the Fed had to buy $3.5 billion in longer term maturity bonds and prop up the auction. They cannot fool us. The system sinks into deeper trouble every day. All we can say is you had better own gold and silver. What the Fed did was buy 18.4% of the auction with money they created out of thin air – more monetization.

Goldman Sachs CEO, Lloyd Blankfein says he believes the current upturn in world markets was probably not a full recovery from crisis and said he expects a further long recession. There is no reason to think this is it – so many things have to be sorted out. Why, would this be the recovery?

Nouriel Roubini says those are yellow weeds, not green shoots. He has nine reasons for pessimism. Employment is still falling sharply, which is bad news for consumption and the size of bank losses. He said this is a crisis of solvency, not just liquidity, but true de-leveraging has not really started, because private debts of households, financial institutions, and corporations are not being reduced, but rather socialized. Lack of de-leveraging will limit the ability of banks to lend, households to spend and firms to invest.

In countries running current account deficits, consumers need to cut spending and save much more for many years. Consumers have been hit by a wealth shock, that is falling house prices, stock market, rising debt-service ratios, and falling incomes and employment.

The financial system has been severely damaged, so the credit crunch will not ease quickly.

Profitable, owing to high debts and default risk, low economic and revenue growth and persistent deflationary pressure on companies margins businesses, will continue to be constrained from willingness to produce, hire workers, and invest.

Rising government debt ratios will eventually lead to increases in real interest rates that may crowd out government spending and even lead to sovereign refinancing risk.

The monetization of fiscal deficits is not inflationary in the short run – slack production and labor markets imply massive deflationary forces. If banks do not find a clear exit strategy from policies that double or triple the monetary base, eventually either goods price inflation or another dangerous asset and credit bubble, or both, will ensue.

We’ll interject here that we disagree with Mr. Roubini. That monetization causes inflation immediately, which later becomes hyperinflation. The central banks, the Fed in our case, have no clear exit strategy. What they have done and are doing has no fallback or battle orders for withdrawal.

Some emerging market economies with weaker economic fundamentals may not be able to avoid a severe financial crisis, despite massive IMF support.

Our comment is no one is going to escape. Decoupling is a myth and we’ve had that proven already.

...

GOLD, SILVER, PLATINUM AND PALLADIUM

As we get closer to June Comex delivery there is great concern that gold delivery of physical contracts cannot be met due to what can be called naked shorting.

Commercials have sold gold they cannot deliver. It looks like the US government, which is behind these positions, will again have to call in help for delivery like they did recently from the ECB and Deutsche Bank. All of this, of course, is illegal, but your government has its own set of rules. What could end in a classic debacle are the June gold options if enough are in the money and are called for delivery. It is our guess that if this happens and the government doesn’t come up with the gold again, that the gold pit could collapse. What we will witness over the next two weeks could be a gold explosion, especially if gold were to breakout above $1,000. Massive demands for delivery could take place. The forces of darkness again attacked gold last week as well as the shares and both have rebounded. The elitists are unable to keep the gold price down for any period of time. If the Comex collapse doesn’t come this month it most certainly will come in September. This is why we use a long-term buy and hold strategy and buying each time there is a dip in prices. Government is terrified and has put up every roadblock imaginable to inhibit and retard delivery. In the course of all this the elitists who have a revolving door between Wall Street, Washington and the Fed refuse to fix the system and they continue to add massive debt to the system, which only makes the situation worse. The system has to be restructured – purged – via bankruptcy and an exchange of equity for debt. We know the elitists won’t do that. If they do their power will be broken. This is why those who understand the problem are taking delivery of gold and in the case of most small investors taking delivery of coins and bullion and buying gold and silver shares.

Both Germany, from the US, and Dubai from London, cannot get delivery of their gold. This is why Ms. Merkel, German Chancellor, spoke out on debt last week; to force delivery of their gold, which the US cannot deliver. The same is true in London just as it is on Comex. One day you will turn on the news in the morning and you will learn that gold has jumped $500 to $1,000 overnight. Get ready for it because those kinds of events are in our future.

...

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SATURDAY, JUNE 13, 2009

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-- Posted Sunday, 14 June 2009 | Digg This Article