From the Trading Desk
The Fed leaving rates unchanged last week seems to have already been forgotten. Gold finished last week on a high note and pressing to break through resistance at $1,140. But this week it has started off with a whimper and has backed off the $1,140 handle to trend lower. The USD has gained ground against the euro amidst market speculation that the Fed will eventually raise rates later this year. USD strength today, combined with liquidation in the stock market, contributed to the precious metals moving south. Platinum felt the most pain today as it plunged to six year lows. Anxiety over global auto demand, a major share of platinum usage, seemed to be the catalyst for the exaggerated sell off. Silver finished below its 50 day moving average and next support comes in at $14.50.
I Thought the Dollar Was Doomed?
Yesterday I said let the dollar be your key. Today we saw the dollar shoot up over 96 on the index and gold and silver get hit. This is still your key data to watch at present. Do you see how this confirms what I said yesterday that even though the economic data is lousy, the dollar is taking on a roll of the go to place to park money when uncertainty is everywhere, especially if outside of the U.S. As I said yesterday, and have been for years actually, this will have the potential to have a negative affect on gold. I’m not sure how Peter Schiff explains this rise in the dollar, but that’s how I see it.
There was a report that just came over the CNBC website; “A big downdraft in commodities is weighing on stocks and feeding fears of global deflation.” First off, it’s nice to see someone at CNBC recognize deflation as an issue. The potential of this is a snowball effect which I’d like to put this into perspective for you as I think it will help your trading moving forward. It’s a synopsis from a book written by Wilhelm Ropke called “Crisis and Cycles.” It’s a rough explanation but I am using this comparison of the 1929-1933 deflationary episode to today’s in my next book “Illusions of Wealth.”
In his book Crises and Cycles, Wilhelm Ropke explained similar circumstances to our deflationary environment today. It’s important to understand this as it can give us some insights into our own investment choices moving forward.
“The saddest and most obvious expression of the world crisis is to be found in the shrinkage of production throughout the world.”
Building activity fell 50% in Germany and the United States. Automobile production fell along with world trade. But it was the international credit crisis of 1931 and consequent abandonment of the gold standard in most countries that resulted in an almost complete breakdown of the system. You will recall from Chapter xxx how the dollar was devalued during this period. Incomes fell during this time and unemployment shot higher.
It was during this credit contraction that banks also began to suffer. Ropke writes; “The banking statistics are of special interest in this connexion, since they reflect the process of credit contraction (deflation) underlying the more general process of business contraction.8 Especially significant in this respect are the figures of the decrease of bank credits and advances, of the turnover of bank deposits (velocity of circulation of bank deposits), and of the volume of bank clearings. Bank credits and advances had dropped in 1932 in Germany (Big Berlin Banks) and in Austria to almost one-half compared with 1929, in France and Holland to two-thirds, and in the United States, England and Wales, and Italy to about three-quarters. The velocity of circulation of bank deposits (ratio of bank debits to the average of bank deposits) declined, in the United States, from the peak rate of 3 in October, 1929, down to the rate of about 1 at the end of 1932 and in the first months of 1933.”
Why is this important to us today? Because we are repeating this scenario. In the 1929-1933 deflatioary episode, balance of payments became an issue because France and the United States had most of the gold. “With the declining volume of world trade and the complete collapse of the prices of raw materials, the burden of this foreign indebtedness became increasingly unbearable for the greater part of debtor countries, especially for the countries producing raw materials. This, in turn, had disastrous effects on the banking systems of the creditor countries. So it was that numerous bank failures in the United States were closely connected up with the South-American failures. In addition to all this, irregular movements of capital, directed by the motive of security rather than by the motive of economic yield, gained an importance unheard of hitherto.”
To substitute for this lack of liquidity or hoarding, central banks around the world, including here in the U.S. have been implementing Quantitative Easing (QE).
If we really are becoming a hoarding society, where will the buyers come from for the products companies produced? Even Wal-Mart’s sales are down at present as net income fell 15%.
The truth of the matter, as Ropke concludes, “without the spirit of confidence, optimism, and easiness, all recovery programmes will rest on sandy ground.”
Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
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