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Best 'Currency' Right Now? It Might Be Gold

by: Ken Bell September 15, 2008 | about stocks: GLD / SLV / UDN / UUP    

Ken Bell

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One day, the Dow rises nearly 300 points. The next day, it gives it all back. United Airlines (UAUA) is down 99% one minute. A few hours later, it's back to even. In the evening, Lehman (LEH) is solvent. By the next morning, the company has filed for Chapter 11 bankruptcy. Bernanke is forming complete sentences at the start of the day but by the evening...

Fear rules the day. There is a general liquidation underway. About the only things increasing in value in recent weeks are the U.S. dollar, U.S. treasury securities, alcohol sales, and irritable bowel prescriptions. As for the dollar, there has been speculation that the dollar rally is the product of coordinated intervention from the U.S., Europe, and Japan given recent reports of just such a plan being drafted back in March. Given the fundamentals in the U.S., I wouldn't rule this out.

Aside from possible government intervention, the best thing the dollar has going for it right now is that it's not the Euro or any of the commodity-based or emerging market currencies. People have to keep their money in some currency, and as money is extracted from markets around the world, investors are choosing to move it to the "safe" U.S. dollar. Although this dollar rally has been powerful, its sustainability needs to be seriously questioned given the following:

  • The U.S. government is now on the hook for future Fannie (FNM)/Freddie (FRE) losses. Total losses will depend on the severity of the housing/credit debacle, but it isn't a stretch to imagine losses in the $1 trillion range.
  • The U.S. budget deficit in August alone was $112 billion.
  • The U.S budget deficit is forecast to be $407 billion in 2008 and a record $438 billion in 2009.
  • The $438 billion for 2009 does not include any funds used to "conserve" Freddie or Fannie or any new fiscal stimulus package, and it doesn't account for the full cost of the Iraq War (let alone any new incursion into Iran, the Caucasus region, or Pakistan/Afghanistan).
  • About the only thing supporting GDP growth in the past two quarters has been net exports, thanks to the falling value of the dollar. The recent strength in the dollar is likely to blunt this tailwind.
  • The risk of competitive currency devaluations is very real as every country battles for a piece of the shrinking pie of investment and consumption spending.
  • The Fed continues to swap high-quality Treasury securities for garbage securities.
  • U.S. unfunded liabilities range from $50 trillion to $95 trillion (depending on the assumptions used).

Of course, we don't have the money to pay for any of these items since our national debt exceeds $9.6 trillion, and we're already running an annual budget deficit. So, our over-leveraged government will have to rely even more on the kindness of strangers to fund our spending.

A borrower living beyond her means. Using her "home" as an ATM. Deteriorating credit score. Stagnating real income. Dependent on low-cost borrowings. Sound familiar?

It's comically implausible that our financial obligations will be repaid with dollars worth anything close to their current value. (The dollar has lost 95% of its purchasing power since the Federal Reserve system was created in 1913. Given our current debt situation, this trend is certain to continue over time.) The difference between the U.S. Government and a subprime borrower is that the government controls the printing presses. There is little doubt that the presses will be working over-time in the years to come.

As history has shown, all fiat currencies are ultimately doomed. The temptation to devalue the currency is just too great over time. The dollar may continue its near-term rally as investors search for "safety" and/or if government intervention is indeed underway. Ultimately, however, the fundamentals will matter again.

Our Chinese Yuan and Japanese Yen exposure have held up fairly well this year, but the "currency" position that we find the most intriguing currently is one that has stood the test of time and held its value for hundreds of years. This solid currency has been caught up in the recent wave of asset deflation and is now off its recent peak by about 25%.

I'm talking about gold (and silver). As I always caution, trying to pick bottoms is futile, as is trying to time short-term moves. In the current environment, the curtailing of risk, fund redemptions, and losses on a variety of securities is forcing the sale of virtually all liquid assets, including precious metals.

However, given the poor and deteriorating financial condition of the U.S., the need for our government to continue depreciating the dollar over time, the historical track record of all fiat currencies, the recent pullback in the price of gold and silver, and the supply constraints facing mining companies today, this may well prove to be another excellent long-term opportunity to add to gold and silver. We are increasing exposure in most portfolios at these levels.

Disclosure: The Rubbernecker is long alchemy and sluice boxes and short printing presses.

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This article has 11 comments:

  •  
    Sep 15 03:16 PM
    'As for the dollar, there has been speculation that the dollar rally is the product of coordinated intervention from the U.S., Europe, and Japan given recent reports of just such a plan being drafted back in March."

    Finally.... The dominos fall and the dust settles and the admissions begin.. Read back on earlier posts for more revelations of massive intervention. Massive meltdown ahead...Bernanke and friends just postponed the massacre..
    Reply
  •  
    Sep 15 03:18 PM
    The premium on silver(if you can find some ) is ranging from 10 to 40 %
    How the price can decline during an apparent shortage is beyond me so I just keep buying it at every opportunity.The premium I pay now will be small change when the paper market implodes :)
    Reply
  •  
    Sep 15 04:14 PM
    Unless you mean gold mining shares, precious metals are not liquid investments. Also, in the current deflationary environment -- I believe right now that is where we are -- it is not surprising to see all commodities falling in price. That will change once a bottom is in place. Right now, with the Dow off by nearly 500 points, I don't see the precious metals going anywhere but down today.

    I am waiting patiently for the markets to tell me that they have bottomed. I might lose some of the upside, but I am not going to buy simply because things look cheap as opposed to last week. With that reasoning, I would be buying all the way down with commodities, foreign countries, foreign currencies and precious metals.
    Reply
  •  
    Sep 15 09:16 PM
    While AMwhatever waits he is being victimized by lousy logic. Gold is highly liquid..in fact, I could liquidate any..as in UNLIMITED..amounts of it tomorrow for cash..so that's unsupported nonsense.
    Gold is only a "commodity" in the broadest sense of the word. It's really MONEY. Looking at gold in a NOMINAL sense will NEVER take you where you want to go...look at it in a REAL sense. So..if the DOW is declining 4.42% (Monday, Sep 15th..2008) and gold is rising 2.6% on the same day tell me that gold is like zinc..or coal..That's nonsense.
    Gold is an alternative currency....ignore it at your risk.
    Reply
  •  
    Sep 15 11:20 PM
    geo--- you are right gold is money but it always seems to follow commodities as well as real estate both of which are headed down--big time. Gold is going down much more.
    Reply
  •  
    Sep 16 08:39 AM
    Anybody watching CNN??? Their positions have certainly changed since two days ago... meanwhile McCain Palin Bush and cronies still think the fundamentals are strong.
    Pathetic. Somebody needs to have their pulse checked. Highest foreclosure rate since the Great Depression? The middle class is dying!! Sure things look good for the rich Republicans, generally they are the ones taking profits on Freddie and Fannie and fleeing the room!!
    Ridiculous!!
    Reply
  •  
    Sep 16 11:25 AM
    Watch out for next week.....some nasty things are going to happen between the 22nd and the 27th. I subscribe to a data analysis company and they said MONTHS ago that this meltdown was going to happen but something really nasty will happen next week. Have cash and fuel available just in case folks.
    Reply
  •  
    Sep 16 09:29 PM
    Gold doesn't follow real estate, CLH.
    AMV, we're not in a deflationary environment. Once the deleveraging is over and the Fed further reinflates, the fact that we're in an inflationary environment will be more obvious.
    Reply
  •  
    Sep 17 01:06 AM
    Gold is so 20th century! We dont need gold as a store of value anymore. The AIG premium generation machine will replace it. Read and weep GOLDILOCKS. For a mere 85b of taxpayer money, the fed controls the world. Everywhere insurance is being priced and premiums paid. 130 different countries a tower of BABEL, a tower that understands insurance. Paid to the FEDERAL RESERVE in dollar. Making sense yet? The premium goes into the FEDERAL RESERVE not the TREASURY. 3 quarters of all mortgages are FEDERAL RESERVE. The rents, the INSURANCE goes straight into the FEDERAL RESERVE. Who needs gold 20% of AIG equity will be traded on a "PUBLIC" DARK POOL. Global payments to bottom line of private company. Several "citizens" will always be gettin rich. Got the taxpayer coming going and standing still. The spokesman said "feds" clearly a better class of world citizen. There will be a huge DAVOS party this year. Gold will be too much trouble to allow rise, and premiums will always mess with gold. Dollar will be solid. KING DOLLAR, KING KONG GLOBAL INSURANCE SYSTEM! WELCOME MIGHTY KKGI?
    Reply
  •  
    Sep 17 02:27 AM
    elwind45, I'll give you an ounce of silver for the name and number of the guy who sold you the last thing you ingested before posting. Or a $20 FRN, your choice.
    Reply
  •  
    Sep 17 09:00 PM
    After AIG does McCain still think the economy's fundamentals are strong??? What about tomorrow after the Washington Mutual collapse. CNN says, "Don't panic". Okey dokey.
    Reply
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