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Gold Rising As All Currencies Devalue In Stagflation Environment

Commodities / Gold & Silver Feb 13, 2008 - 02:02 PM GMT

By: Jim_Willie_CB

Commodities Best Financial Markets Analysis ArticleA profound broad gold rally is underway. It is occurring in almost every single major currency. Unsure about Zimbabwe though. In the last article, two major forecasts were made, both hit squarely. The euro fell, heading toward the 143 stated target forecasted. Talk circulates about the Euro Central Bank eventually cutting interest rates. Pressure will grow enormously. The Germans are isolated in wanting a hard line against price inflation. A Latin Bloc has formed, urging a rate cut as the southern nations of France , Italy , Spain , Portugal , and Greece suffer from housing declines. Even Ireland has joined that bloc. A compromise will be worked out, more like a gang-up against the Germans.


In my view, the 143 target is still on the board, as the euro 20-week moving average serves as a few logs on the roadway. In time, a cleared path down a little more. Much of the euro rise has been predicated in the last year or more upon continued rate hikes. Not only will they not happen, but rate cuts will be more the norm. The Competing Currency War ensures it. The US Federal Reserve has exported its monetary ease policy. Foreign currencies simply cannot fight it.

A twist has occurred in addition. The US Dollar enjoyed a bounce, jumped up from the vigorously defended dangerous 75 level, touched 77 at the 20-week moving average, only to be rebuffed. That US $ bounce was the second forecast. Look for a rally toward 78 after the euro comes down a bit more. The key is the Euro Central Bank. Incredibly, pressures are growing which might actually pull apart the European Monetary Union. To preserve the union, the ECB will cut rates, although much much much more slowly than the openly utterly desperate Americans.

The United States is the source of the banking implosion, the source of the mortgage bond destruction, the source of the bond insurer disintegration, the source of the risk model meltdown, the site of the credit derivative pyramid topple, the source of the urgent interest rate cuts. WHAT A MISERABLE FAILURE THE US BANKER CUSTODIAN PERFORMANCE HAS BEEN FOR TWO DECADES!!! The US Fed will cut rates down below 2%, perhaps even to 1%, in total desperation. The tragedy is that the lower rates will not stop the banking wreckage, will not stop the US Economic recession, will not stop the housing crash, will not stop the credit derivative meltdown, but will ensure the eventual US Dollar demise.

GOLD RALLY IN EUROS

The effect of a euro in retreat, but a gold price hovering over 900, is a nice gold rally in euro terms. This effect is not fully visible to Americans, who tend to think 90% about US factors, and 10% about multi-national firms, and do not speak foreign languages. Yet they consider themselves superior to the swarthy foreigners who are bilingual and even multi-lingual, as well as being better educated in mathematics and science.

The gold price is rallying in euros, which is tremendous news for the global gold rally. Gold is also rallying hard in swiss franc terms, a strong confirmation for gold. Given the importance of banking supremacy returning to Europe , to Switzerland in particular, the new foundation of the gold rally rests in Europe . So a gold rally in euro and swissy terms is of ultimate importance. The greater accommodation given by the Euro Central Bank will provide a strong continued lift to gold on the old continent.

YEN TO SOFTEN, GOOD FOR GOLD

The Japanese yen has put in an intermediate top. Rather than to show the gold chart in yen currency terms, observe the yen chart. The gold-yen chart looks much like the gold-euro chart, a rising bull. The importance of the yen is incalculable for to sustain the global liquidity movement in favor of continued speculation. It was no coincidence that the US stock market suffered hefty declines while the yen currency rose from 87.5 to 94 in the past two months. Speculative money, heck basic investment money, was drained from the system. That phenomenon gained attention. The Yen Carry Trade, whose principal beneficiary is the Bank of Japan itself, will continue. Even though the BOJ has a lunatic 0.5% official rate, it could be lowered! There is no way the US Fed descends to the shameful 1% or 2% rate level without the Japanese obediently heading toward 0% themselves, maybe not actually zero but closer to zero. The yen is soon to fall toward the 90-91 range, giving more support for the beleaguered US Dollar As the BOJ cuts rates, as the yen comes down a little, it encourages the gold bull market in their corner of the world.

AUSSIES SHOOT THEMSELVES IN FOOT

Last week, the Reserve Bank of Australia (RBA) actually hiked their official interest rate by 25 basis points. Rather than show the gold chart in aussie currency terms, observe the aussie$ chart. The gold-aussie chart looks much like the gold-euro chart, a rising bull. At 7%, they invite a carry trade to invest in the Aussie Dollar with money borrowed from the low US rate. This is just theory, hard to put into practice, and here is why. Many reasons apply. The US has not finished lowering interest rates. Going short the US Treasury when rate cuts continue would be risky. The 2-year US T-Bill yield is more stable, but it should descend under 2% with more vigor before long, as the US Economy shows unmistakable recession evidence. Lower bond yield means higher principal value, and damage to shorts.

Also, the Australians do not have a huge robust bond market. Inadequate liquidity obstructs any serious effort to institute or encourage a carry trade. The Aussie's responded to price inflation, while putting their conventional economy and housing market at great risk. The Aussie Dollar will come down. It registered a double top. Their central bank will remove that rate hike within a couple months. It was a kooky maneuver. The great commodity bull market cannot be halted by Aussie rate hikes. Live with it, by holding back on monetary growth. As the RBA cuts rates in response to a declining housing market and thus economic falter, the aussie$ will come down a little. That will encourage the gold bull market in their corner of the world.

INFLATION DRIVES GOLD & SILVER

The main driver for the precious metals has shifted to inflation. The chief lever is not the US Dollar anymore, as hidebound dolts miss the point and the enlightened see the shift. Put aside the nutty definition by the clowns of Wall Street and agencies of the US Govt. Prices are not the key, but rather supply of US$ funds flooding the global system. From 2003 to 2006, we had an inverted US Treasury yield curve. That clearly indicated the economic recession we find ourselves in now. So-called economists, more like carnival barkers and whores in three piece suits, called it a conundrum. The signaled recession is here.

Next the steepened US Treasury yield curve is screaming about inflation. The yield spread went from zero at the beginning of year 2007 to around 180 basis points now. Combine the successful previous signal with the current signal are you arrive at a loud STAGFLATION situation. This is not complicated. In order to foment confusion, Wall Street prefers to complicate things. Nothing confusing about the ratio chart shown, of the 10-year yield ratio versus the 2-year yield. Its relative strength is almost off the chart, hovering at 90 in an occurrence rarely seen in any chart. It confirms the money growth enforced globally, and provides a strong signal for the gold price. All central banks will soon be cutting official interest rates.

GLOBAL ENERGY WAR

Meanwhile, more grenades on the oil front, as weakened strongman Hugo Chavez is embroiled in an international court battle with Exxon Mobil. Did Hugo expect the oil giant to take it lying down? They have lawyers on the payroll. A multi-billion confiscation usually invites a reaction. Ironically, if Hugo cuts off the US on oil or gasoline or diesel shipments, he might not be able to adequate replace such ongoing contracts with Chinese contracts so quickly. Maybe the Venezuelan people can follow up their refusal to permit his dictatorship to become an institution, with some measure that leads to his removal from office. Not likely, but if major revenue is cut off, tens of thousands of demonstrators led by students might take to the Caracas streets. The prospect of New York courts making decisions with national appropriation in the background somehow seems laughable. What is the legal precedent for retaliation after seizure theft by a state corporation? Crazy times. Just another factor to keep the crude oil price chronically high. Besides, if the New York court acts in strong terms, it might set a precedent for action against US rogue financial firms engaged in fraud and home seizures!

EDITOR NOTE: Strange times in Costa Rica . No article last week. They have a strange custom here, closing the bus door in the face of gringos. This time, my reaction was to catch it with my left hand. Dumb move. The door closed on my wrist, like 150 lb weight. After some confusion, the driver opened the door. Fingers did not function for a few days, numb fingertips. Next time my shoe, not my hand. A learning process, maybe take more cheap taxis. Still a ‘plebe' at heart.

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