Chart of the Day: Gold and Silver Versus the U.S. Dollar

Wednesday, August 03, 2011

Investors in the precious metals space are no doubt aware that the U.S. dollar has been on a steady decline versus its peers over the last several decades.  The Dollar Index, which tracks the USD against 6 other currencies, including the Japanese Yen and Swiss franc, recently came within a hairs breadth of making a new all-time low on July 26th, during the worst of the debt ceiling hysteria, at 73.45.  The all-time low for the index was hit in March of 2008 at 70.698, just before the mortgage meltdown of 2008.  On May 2nd of this year it hit 72.72 its low since 2008.  Over the last few days the US dollar has made a modest rebound to 74.3.  Unfortunately, this is still close to its all-time low, and compares unfavorably with its level at the start of the year of 80.

Goldcore.com today published a fairly comprehensive overview of the precious metals market.  Included in its analysis was the following chart from Bloomberg.  It shows the negative correlation of the US dollar with the performance of gold and silver since 2000. 



As can be seen, the dollar's depreciation has corresponded with the rise in gold and silver.  There are many factors which have been weighing on the dollar, but they can all largely be summarized as fiscal factors or monetary factors.  For instance, today's near magical recovery in U.S. equities corresponded with a Wall Street Journal report with former Vice Chairman of the Federal Reserve, Donald Kohn who indicated the Fed would certainly consider another round of quantitative easing if the U.S. economy continued to flag, and threats of deflation became pronounced.  Another round of quantitative easing would represent hundreds of billions of dollars of money printing by the Federal Reserve to buy Treasuries in an effort to drive already record low Treasury yields even lower.  For those that might not remember, QE2 was a $600 billion dollar affair. 

Additionally, the recently passed debt ceiling legislation has increased the Federal Government's credit card limit by a cool $2.4 trillion.  It should be no surprise that rising national debt levels correspond with a weaker national currency.  One need only ask Greece, Ireland, and Portugal.  Unfortunately for them, their participation in the EUR has prevented their currencies to weaken in response to their sky-high debt levels.  The EUR however, has indeed been under pressure.  The common refrain in financial markets regarding the EUR and the USD is that they are in a race to the bottom. 

Meanwhile, current budget deficit forecasts for the U.S. of 7%-8% in 2012 and 2013 rely on a 3% GDP forecast.  With the U.S. on the brink of entering a recession now, it seems highly likely that the 3% GDP forecast for 2012 and 2013 will be drastically cut in the weeks and months to come.  Combined with the end of fiscal stimulus, and some fiscal contraction thanks to the very modest deficit reduction measures in the debt ceiling legislation, U.S. budget deficits are likely to be closer to the current run-rate of 10% for the foreseeable future.

Collectively, monetary and fiscal policy outlooks for the U.S. suggests that weak US dollar trends will persist.  This would bode well for silver and gold if the historical correlation between the USD and precious metals continues to hold.  Two notable upcoming events that will likely impact both the fiscal and monetary outlook of the U.S. include Friday's non-farm payroll report for July, and the August 9th FOMC meeting.  A worse than expected payroll report would certainly be dollar negative, as would any hint of QE3 on August 9th. 

http://www.gainesvillecoins.com/news/338/Chart-of-the-Day-Gold-and-Silver-Versus-the-U.S.-Dollar.aspx  

S&P just announced late this evening that they have downgraded the U.S. debt rating from AAA to AA+ with a negative outlook

S&P just announced late this evening that they have downgraded the U.S. debt rating from AAA to AA+ with a negative outlook.

 

NIA is absolutely shocked by this. What shocks us is just how long it took them to make this downgrade. Just like how S&P and Moody's didn't downgrade subprime CDOs until the mortgage-backed bonds they held were practically worthless, S&P waited for U.S. debt obligations to reach five times GDP and for the U.S. dollar to lose 84% of its purchasing power over the course of a single decade. The U.S. was a hair away from defaulting on its debt this week if the debt ceiling wasn't raised, yet it still had a AAA rating.

 

NIA believes that a AAA rating should be reserved for countries that have budget surpluses, low levels of debt that could easily be paid off without printing money, and low levels of inflation. The U.S. had a cash budget deficit last year of $1.3 trillion, but once you include increases to unfunded liabilities, our real budget deficit was approximately $5 trillion. Even if Americans were taxed 100% of their income it wouldn't be enough to balance the budget.

 

It is hard to imagine a fiscal situation worse than this, but the credit ratings agencies have justified giving the U.S. a AAA rating based on the dollar's status as the world's reserve currency and the Federal Reserve's ability to monetize our deficits and debts by printing money. If it wasn't for our printing press and the world's willingness to accept and hoard the dollars we print in return for the real products and commodities they produce, the U.S. credit rating would be junk.

 

S&P claims that their reason for downgrading the U.S. debt rating at this time is because, "the differences between political parties have proven to be extraordinarily difficult to bridge". According to S&P, it is because our two political parties are so far apart that we weren't able to pass a bill with anything but modest spending cuts. The reality is, the Republicans and Democrats aren't far apart at all. Neither parties are serious about cutting spending and the underlying fundamentals of both their proposed bills were exactly the same. The Republicans that American tea party supporters elected to office have broken their promises to make major spending cuts and have accomplished absolutely nothing positive since entering office.

 

Our country just had an unbelievable opportunity to dramatically cut government spending in a last ditch effort to prevent hyperinflation. Instead, our government passed a bill to raise the debt ceiling that had no real spending cuts at all. The mainstream media tried to spin the bill into being a victory for U.S. tea party supporters due to the purported "spending cuts" that it contained. The truth is, government spending is set to rise every single year until the dollar is worthless. The $2.1 trillion in phony spending cuts are only tiny reductions to large spending increases and none of them will begin until early 2013 when we will need to once again raise the debt ceiling. Even if the government in early 2013 decides to follow through with them, rising interest payments on our national debt will mean substantially larger budget deficits than what are projected today.

 

With the stock market down big in recent weeks, NIA believes that this evening's news is already mostly factored into stock prices. With the Fed Funds Rate having been left near zero for over two years, the world is flooded with excess liquidity of U.S. dollars and there is no chance of the stock market crashing like in late-2008/early-2009. In fact, the recent downward move in the stock market means the Federal Reserve is likely to soon implement additional monetary inflation measures and will leave the Fed Funds Rate near zero permanently.

 

The GDP was already on its way to becoming negative in the second half of 2011 and if the U.S. wants to avoid a debt default later this decade, it needs the Federal Reserve to print enough money to see at least 5% annual nominal GDP growth. It's not just the Federal Government that needs GDP to grow, but most cities and states will default on their debts if GDP doesn't grow rapidly. Cities and states don't have printing presses so unless the U.S. government wants to bail them all out like the European Union is bailing out Greece, Portugal, and Ireland, it needs to create GDP growth even if that means the Federal Reserve eliminating interest payments on the $1.6 trillion in excess reserves held by banks and taxing banks who don't lend the money.

 

NIA prays that Americans don't make the mistake of buying U.S. Treasuries as a safe haven, as they are now the riskiest asset of all. If U.S. Treasuries rally next week, it will only be temporary and will be followed by the largest and sharpest reversal in history with a crash in Treasury prices and an explosion in yields like never seen before. Most Keynesian economists will likely forecast rising Treasury prices despite the U.S. debt crisis, because they claim the bond markets in other countries are tiny compared to ours and there simply is no other place to park safe haven money. In our opinion, there is no reason to own the fiat currency denominated bonds of any country or company. Gold and silver are the only true safe havens and it is our belief that by the end of this year, the U.S. public will begin investing into gold and silver in droves as they realize that although we avoided a debt default for now, a debt default by inflation is still on its way. The largest ever short-term rally in precious metals and mining stocks is ahead.

 

It is important to spread the word about NIA to as many people as possible, as quickly as possible, if you want America to survive hyperinflation. Please tell everybody you know to become members of NIA for free immediately at: http://inflation.us