A Rush Away From $$$? Gold Percolating...

Posted by urbandigs

Tue Oct 6th, 2009 08:27 AM

A: When I talked about gold as an anti-fiat currency trade, rather than a hyperinflation trade, it sparked a wide range of emotions from people. For some reason when you talk about gold it seems either you are a gold bug or a gold hater, and no matter what you argue people will hold on to their beliefs. But when you start hearing talk of Arab states switching to a basket of other major currencies for pricing oil trades, it kind of makes you wonder what is going on out there. Either way, it is making the gold markets percolate again as fears of a currency crisis may ultimately become a self fulfilling prophecy.

I first want to re-iterate my thoughts on the gold trade, going back to "How IN Is Gold":

THE CORE OF THE GOLD TRADE LIES IN THE DEBASEMENT OF ALL FIAT CURRENCIES TO COUNTERACT THE GREATEST WAVE OF CREDIT DEFLATION SEEN SINCE THE GREAT DEPRESSION.

My deep down opinion is that gold is performing how it should, at a time when general confidence in fiat currency is declining. In my humble opinion, the gold trade is not a hyper-inflation trade right now, but more of a lack of faith in paper money/fiat currency trade that ultimately could test its inflation adjusted high. Those in it now for the inflation hedge, are along for the ride as the world united battles deflationary forces.

For the next few years while global fiat currencies are systematically debased, via central bank printing to counteract local slowdowns, the future whiplash-inflation trade (maybe 2012-2013) will be slowly building as the Kondratieff Winter plays out. It seems logical that the gold trade is a multi-year trade; if it doesn't get parabolic too early.
By the time inflation does become an issue, perhaps in a few years, gold will already have made its move. It will power the next phase of the move. That is when you will hear talk of gold having been a leading indicator of inflation, so look at what gold is trying to tell all of us!

Now we start to hear about "The Demise of the Dollar" by Robert Fisk over at The Independent:
In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.
Sounds very conspiracy theory doesn't it and Mish is already beating it down is pure silliness:
Saudi Arabia, China, Japan, and any other country can hold whatever reserves they want in whatever currencies they want regardless of the pricing unit of oil. Reserves are based on trade relationships not pricing units!

Pricing oil in Euros (or even sillier - a basket of currencies) will not cause anything to happen. If pricing unit changes do happen, they will be a result of sentiment changes in regards to existing dollar hegemony and not the other way around. Dollar Armageddon is not coming over a pricing unit, nor did the US invade Iraq for that reason. The story is nothing meaningless hype.
Mish always makes a strong point, but stranger things have happened to cause a future domino effect.

Then Bloomberg picks up the piece, "Dollar Falls on Report Gulf States May Stop Using Greenback":
The dollar declined against 15 of its 16 most-traded counterparts as Asian stocks rallied and the Independent reported Persian Gulf states along with Japan and China are discussing dropping the greenback for oil trades, citing unnamed sources. The yen rose after Japan’s finance minister said he told Group of Seven leaders that weak-currency policies were undesirable.

Meetings to discuss the transition have already been held by finance ministers and central bank governors from Russia, China, Japan and Brazil, the newspaper reported.

“The very fact that such an idea is being entertained is undermining the dollar,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong.
This is when just talk can rattle markets and ultimately become a self-fulfilling prophecy. Maybe it doesn't happen, I dont know, in fact I have no clue what these guys are talking about. Seems like a red herring to me. But maybe that doesn't matter. Maybe the end result can happen anyway just by pure momentum sparking a chain reaction of events. Maybe Jim Rogers was right that there would be a currency crisis by the end of 2009.

I find it interesting how gold is performing well in almost all fiat currencies. I find this chart that plots gold's performance relative to a basket of 8 currencies.Those currencies are: 1) Australian Dollar; 2) Canadian Dollar; 3) Swiss Franc; 4) Eurodollar; 5) British Pound; 6) Singaporean Dollar; 7) Japanese Yen; 8) US Dollar:

fig-z-6.jpg

"Relative to other currencies, gold continues to outperform. The red vertical line was the first positive reading from the indicator after about 10 months of being negative. This was 10 weeks ago and gold was trading at $960 an ounce."
So lets see, the dollar crashes, cost of imports go through the roof, we can't buy that much stuff anymore, and that works out how for the rest of the world? Things that make you go hmmmmmmmmmmmm. There is a reason I think that the first bout of inflation will be in the form of higher food, energy, raw commodities, metals, health care, etc..the stuff that squeezes profit margins and consumers wallets; right when unemployment is likely at or near its peak.

Crazy times.

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