With gold getting whacked hard yesterday, it was a time for sober reflection in the gold-obsessed Rick’s Picks chat room. A trader who goes by the handle “Padre” saw “the Jungian collective unconscious” at work. We would take a less kindly view, more Freudian, that saw only id and ego in a state of gratuitous conflict. But we’d be the first to admit that it can be far worse when these forces are aligned; for only then can they produce something as irresistibly corrosive as…money. How so? Well, if you saw the classic sci-fi film Forbidden Planet, you may recall that the Krell civilization, using an infinitely powerful fusion reactor, built a machine that could conjure up all of their needs when ordered to do so telepathically. Unfortunately, while they slept the reactor conjured up monsters from their primitive subconscious (see photo below), and that was what ultimately did them in.
Here on earth we’ve figured out how to do more or less the same thing with money, creating as much of it as we need, and then some, by simply changing certain digital information that has been magnetically stored on a computer. The Krell might have remarked, How very quaint!
So what to make of gold’s dive yesterday? Conventional thinking had it as a flight from a diverse basket of assets into the supposed safety of the dollar. We are not persuaded, however. It is one thing for the newspapers to keep blathering about an economic recovery that is nowhere in evidence for most Americans. But it is quite another for the media to have us infer that the currency of our bankrupt nation is correctly viewed as a safe haven for investors. We won’t argue the point about being bankrupt, either, because anyone who doesn’t understand this by now is living on Altair-4, the Forbidden Planet of titular fame.
A Deflationary Lurch
So if the dollar was not strong because of a flight to safety, what caused it to rise, and gold to fall? Our guess is that short-squeeze pressure on debtors may have been a factor. As die-hard deflationists, we have been expecting this catastrophe to lurch into motion for quite a while. Coincidentally, in the “This Just In…” section of Rick’s Picks, we had linked a fascinating blog on the topic. Here’s that link, prefaced by Rick’s intro:
“A dollar short-squeeze has always seemed more than merely plausible to us, notwithstanding the dollar’s steady decline toward intrinsic worthlessness. Drowning in dollar-denominated debt, the world is effectively short the U.S. dollar in cosmic size. The last thing debtors need is to have the dollar become scarce when they come under pressure to settle short-term loans that cannot be rolled. What will happen when that day arrives, and short-term borrowers cannot beg, borrow or steal dollars? We asked a half-dozen international-finance professors that question a dozen years ago, and they reacted as though we were crazy. A short-squeeze on the dollar!? What on earth were we talking about? Since then, a few others have joined us in recognizing that such an event is not merely possible but likely. Click here to access the latest, fascinating article on the topic.”
Our USA Today Indicator
Meanwhile, we have a great idea for detecting a real uptick in the economy, if one ever comes. We need only look for a commensurate uptick in the circulation of USA Today. The paper’s circulation dropped to number two, behind the Wall Street Journal, according to a story yesterday about the ongoing plunge in newspaper sales at many of the largest papers. “The slump in business travel meant fewer copies of USA Today were sold to hotels, one of the paper’s historic strengths,” according to the article. “USA Today has said it expects the paper’s circulation to rebound as the economy does.”
Just so.
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An interesting adjunct to Rick’s article comes from the nice people at Breakpoint trades.Take a look at page 16 which shows the that the commercial traders have been moving to a very net LONG on the dollar.
http://breakpointtrades.com:80/controls/preview.php?la_id=802
Another very well written and entertaining article, Rick!
My take: China dollar peg is triggering major headaches for the euro economies now and demand for the euro will adjust to reflect reality. See the recent article I linked in one of the previous threads for more info.
The “dollar crash from here” against the euro (huge slice of USDX) should remind us of the $10/ga gas claims: those claims always conveniently ignore massive decreasing demand pressure.
The entire “dollar crash from here” thesis needs to be specific about what the dollar is going to crash against. I would argue gold. And not as measured against the infamous USDX. The dollar has already revalued 50% against the euro since the turn of the century. But the EU is really feeling the pain now in declining exports and manufacturing wage competitiveness and this is greatly exaggerated by the China dollar peg. btw there was a Bloomberg headline today about the negative change in consumer sentiment in Germany for the first time 14 months.
King Euro at this juncture is due for a reality check. So it’s another dollar rally for the short term and King Midas in the long term against all paper currencies i.e. the song remains the same. This is deflation and worldwide currency debasement.
PS Rick it seems that the declining gold volume indicator (warning in recent article by a Kitco-linked writer) was the correct indicator to watch. I won’t link to him because he seems to be a direct competitor of yours.
PPS The EW analysis by poster named christiangustafson over at Denninger’s TA forum just might be panning out bigtime:
http://www.tickerforum.org/cgi-ticker/akcs-www?post=114454
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Thanks for adding so much to the discussion, Senor. Regarding the “direct competitor,” whoever he is, the only person whom I don’t like mentioned or linked on my site is 321’s Moriarty. RA
If you want to delve a little into the latest in fusion reactors, then why not take in some of the happenings in Dense Plasma Focus:
http://www.economist.com/sciencetechnology/displaystory.cfm?story_id=14698355
Link to Google Tech Talk Video:
http://tinyurl.com/yfedmle
Hi Rick and all, Ridiculous that I, happy to say an amateur, saw this coming a mile away…
1. Isn’t it true the European economy/financial sector/Euro is in worse fundamental shape than the U.S.? And now the British economy/pound showing weakness…so with other major currencies also showing weakness why should the dollar continue to slide? They’re all sliding! Its relative.
2. Isn’t it the case that GOLD has NOT risen when priced in the other world major currencies? …the GOLD move has only confirmed new highs in synch with the falling dollar. Seems a painfully obvious nonconfirmation to me.
3. The market is simply and naturally due to correct at current levels too high too quick too unreasonable without the earnings to support reasonable PE and also too high too quick on the Gold/Silver play….so the investor says “hey, time to cash in, park my profits in cash, don’t get greedy…dollars for now won’t kill my holdings.”
4. The world does NOT benefit from further decline in the currency of the most powerful economy in the world right now below that 75 support area. Do we WANT chaos? Forget how we got here, its irrelevant. The European economy (trade balance/ exports not in their favor) would suffer, China exports would suffer, etc., lots of other more technical reasons many of you are far better informed to expound upon. There’s a decent balance here that could allow fundamentals to catch up and improve…the market senses that balance. There is NO balance or going long stocks here, right or wrong? The market has no business advancing from here and the world can NOT afford expensive oil yet. Speculation is ruining the economic fundamentals of supply and demand and we’re all paying for it.
I note these points as an amateur, but an amateur who is however, reading all the best site analysis, watching the markets diligently to analyze what’s next and I saw this coming a mile away. The last 3-4 days I wrote my pals : dollar held support, dollar up with stocks, gold, silver, oil down for the next few weeks.
Cheers, Mario
Rick, given that the entire US “recovery” is predicated on a progressively weaker dollar and the subsequent inflating away of its debts, it seems that any significant dollar rally or bond collapse will prove to be the undoing of this delicate highwire act the Fed and the Treasury seem to be initiating.
If it’s true that it would take only a small rise in the dollar to set off the swift unwinding of the carry-trade, surely there is the risk of a swift and exponential rise which will see pretty much every financial institution who holds derivatives (ie virtually every major bank and insurance company in the world) exposed as bankrupt? Is it a realistic possibility that the dollar’s value could, say, double almost overnight in a form of ‘reverse’ currency crisis?
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The trajectory of a short squeeze is precipitous, although we’d have a warning as the dollar revs up for takeoff. My guess is that 78 or so on the Dollar Index would set a squeeze in motion. I’m not sure about a recovery built on a weaker dollar, though, since we have so relatively few manufactured goods to sell the world. RA
Good article. Actually most of the responses had valid points. I would add that there doesn’t seem to be any contender for taking over the dollars world dominance (yet). Others have also mentioned that the dollar has to fall against other currencies. Which one will hold up if there is a world depression. Finally in order for Gold to shine bright in the future there has to be a total abandonment of all paper and a total collapse of the financial institutions. Will this really happen?
If there is a deflation spiral then the monies proping up the gold game could quickly dry up. I still see the move in Gold as nothing more then loose money chasing the hot commodity. In fact the average Joe I speak to has already been eyeing, if not buying, Gold. It will do well against other commodities, but how well?
Finally, does anyone know what the commercial buyers are doing? The last I looked they were net sellers. Perhaps it’s changed since I saw it last.
@ “I’m not sure about a recovery built on a weaker dollar, though, since we have so relatively few manufactured goods to sell the world. RA”
Taiwan is in turmoil after President Ma had signed agreement to import American beef and cattle organ. President Ma is suffering the worst rating ever. Worsen than that of the way his mismanagement of Aug Typhoon. Why Taiwan society and the Taiwanese are panicky that the government want them to eat American beef and the cattle organs? Remember S. Korean’s anti American beef import movement? Yah. The American Mad Cow Disease. Taiwan people are scared of death. American Beef Scare the wits out of them all. lol. The Taiwanese government has lots of public education to do. They are going to be super busy.
My point is America is pushing its export now like there is no tomorrow. It seems most part of the world are eating American beef except two places: Taiwan and China. I think China will be the next to be pushed to eat American beef and the cattle organs.
p.s. What % possibility do you think there will be another crash coming? And how big will it be?
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We turn Kobe beef into hamburger here and eat nightingale tongues for dessert. Small wonder, then, that we should have become the export world’s main source of offal-based protein. Concerning the crash, it will come when the moon is full and the wolf is on the prowl. How big, Grasshopper? Think of Jupiter as a relative cue ball. RA
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