Best of the Week
Most Popular
1.Bitcoin War Begins – Bitcoin Cash Rises 50% While Bitcoin Drops $1,000 In 24 Hours - Jeff_Berwick
2.Fragile Stock Market Bull in a China Shop -James_Quinn
3.Sheffield Leafy Suburbs Tree Felling's Triggering House Prices CRASH! - Nadeem_Walayat
4.Bank of England Hikes UK Interest Rates 100%, Reversing BREXIT PANIC Cut! - Nadeem_Walayat
5.Government Finances and Gold - Cautionary Tale told in Four Charts - Michael_J_Kosares
6.Gold Stocks Winter Rally - Zeal_LLC
7.The Stock Market- From Here to Infinity? - Plunger
8.Ethereum (ETH/USD) – bullish breakout of large symmetrical triangle looks to be getting closer - MarketsToday
9.Electronic Gold: The Deep State’s Corrupt Threat to Human Prosperity and Freedom - Stewart_Dougherty
10.Finally, The Fall Of The House Of Saud - Jim_Willie_CB
Last 7 days
Best Time / Month of Year to BUY a USED Car is DECEMBER, UK Analysis - 13th Dec 17
A Former Wall Street Veteran: Good Traders Are Born, Not Trained - 12th Dec 17
Buy Gold, Silver Time After Speculators Reduce Longs and Banks Reduce Shorts to Continue? - 12th Dec 17
Masters of Economic and Political Illusion – in Taxes, Debt, Government, and Markets - 12th Dec 17
Approved Used Land Rover Main Dealer Real Customer Buying Guide - Hunters, Chester - 12th Dec 17
Gold Price 100% Bullish Signal - 12th Dec 17
Epic Stock Market & Fixed Income Bubble Will Not End Well - 12th Dec 17
Bitcoin can be stolen. Although Can’t be hacked - 11th Dec 17
Have Stocks Reached A Permanently Rigged Plateau? - 11th Dec 17
Trying To Beat The System Is A Fatally Flawed Investment Strategy - 11th Dec 17
Is This The Beginning Of The Next Silver Rush? - 11th Dec 17
The Dow Gold Ratio - 11th Dec 17
Evidence of a Stock Market Top Mounting - 10th Dec 17
Bitcoin Doesn’t Exist – Forks and Mad Max - 10th Dec 17
Bitcoin Doesn’t Exist – Putting the Banks Out of Business - 9th Dec 17
China’s Struggle for Market Economy Status - 9th Dec 17
Is Gold Really Strong? - 9th Dec 17
Bitcoin Parabolic Mania - 8th Dec 17
SPX Make a 61.8% Retracement - 8th Dec 17
Gold, Stocks and Bonds - The 3 Amigos Update - 8th Dec 17
Gold Stocks Break, Gold to Follow - 8th Dec 17
4 Charts That Show How Trump Tax Cuts Will Trigger A Recession - 8th Dec 17
Precious Metals Breaking Down! 3 Amigos to Abort? 4 Horsemen to Ride? - 7th Dec 17
Bitcoin Just Smashed Through $12k… Wait, $13k… Now $14k… This Is Getting Ridiculous! - 7th Dec 17
Stock Market Tops Look Like This - 7th Dec 17
Crude Oil, Oil Stocks and Invalidation of Breakouts - 7th Dec 17
Bitcoin Doesn’t Exist – 2 - 7th Dec 17
British Pound Sterling Volatility In Crucial Week of Brexit Talk - 6th Dec 17
Day Trading vs Swing Trading: Which One is the Better Strategy? - 6th Dec 17
Crude Oil and Negative Divergences - 6th Dec 17
EU Bailins Coming – 114 Italian Banks Have NP Loans Exceeding Tangible Assets - 6th Dec 17
Bitcoin Doesn’t Exist - 5th Dec 17
Advantages of Car Insurance to Protect a Vehicle - 5th Dec 17
How High Will Gold Go? - 5th Dec 17
The Loonie Takes Flight -- BUT a "Labor Miracle" is NOT the Reason Why - 5th Dec 17
The True Meaning of Bitcoin's 'Success' - 5th Dec 17
Gerald Celente: Middle East Wild Cards Could Bring Down Markets, Drive Up Gold - 5th Dec 17
Silver’s Positive Fundamentals Due To Strong Demand In Key Growth Industries - 4th Dec 17
Stock Market Positive Expectations, But Will S&P 500 Continue Higher? - 4th Dec 17
Bitcoin Achieved What The Gold Market Never Could & Never Will? - 4th Dec 17
Stock Market Top Distribution Starting - 4th Dec 17
Understanding Real Time Forex Trading - 4th Dec 17

Market Oracle FREE Newsletter

Traders Workshop

Currency Cold War

Currencies / Fiat Currency Feb 15, 2013 - 10:47 PM GMT

By: Michael_Pento

Currencies

It isn't much of a secret that gold mining shares have suffered greatly in the past 18 months. In fact, since the summer of 2011 the Market Vectors Gold Miners ETF (GDX) has plummeted nearly 40%. That has caused many precious metal investors to give up hope on mining shares altogether; and to also now anticipate a tremendous plunge in gold prices.

Nevertheless, I believe gold and gold mining shares offer investors a great value at this juncture and let me explain why.


Interest rates in nominal terms are at record lows and have been promised by the Fed to remain near zero for an indeterminate duration. To highlight this point, Fed Vice Chairman Janet Yellen said in a speech to the AFL-CIO this week that the central bank may hold the benchmark lending rate near zero even if unemployment and inflation hit its near-term policy targets. Yellen said the Fed's objectives of a 6.5% on the unemployment rate and 2.5% inflation rate are merely, "...thresholds for possible action, not triggers that will necessarily prompt an immediate increase" in the FOMC's target rate. "When one of these thresholds is crossed, action is possible but not assured." Her statements underscore the fact that the $85 billion per month worth of Fed debt monetization and ZIRP will not end anytime soon.

Since the Fed is NOT anywhere close to raising interest rates or reducing its bond purchases, this should also allay fears that the U.S. dollar is about to enter into a secular bull market. The greenback is just about unchanged on the DXY over the past 12 months and has been mostly range-bound between 79 and 81 during that timeframe. There isn't any evidence that the USD is ready to soar in value against our six largest trading partners. Without a new bull market in the U.S. dollar, the price of gold cannot enter into a secular bear market.

Regarding the notion that the dollar is about to re-emerge as the world's most desirable currency holding, the G20 nations meeting in Moscow this week released a statement proclaiming they are not currently engaged in a currency war. In saying they embrace "market-determined" exchange rates, these most wealthy nations sought to calm fears that Europe, Japan and the United States were outwardly competing to win the crown of the world's weakest currency.

However, in truth the U.S. and Japan are already in the middle of a currency cold war...at the very least. The BOJ has committed to a 2% inflation rate, which is the same target inflation rate the Fed has adopted. To that end, both the Fed and BOJ are purchasing massive quantities of bank debt. Asian Development Bank President Haruhiko Kuroda (the most likely candidate to take over the Japanese central bank next month) said this week, "A two percent inflation target has become a global standard, and it is a landmark decision on the BOJ's part to adopt the same target." The only way a nation can achieve a sustained rate of inflation is to commit to a perpetual increase in the rate of currency creation. This action will send real interest rates further into negative territory. Since both the BOJ and Fed are in a tacit currency war, the only guaranteed winner will be precious metals.

Another factor boosting gold prices is the fact that debt accumulation in the U.S. continues unabated. Not only is the debt to GDP ratio already above 105%, but future deficits are projected to accrue at rates that are 4 times larger than before the Great Recession of 2007. Even if D.C. adopts the sequestration come March 1st, the 2013 budget deficit will still be $845 billion! However, in the unlikely event that sequestration is actually adopted, there is tremendous pressure for Washington to increase its deficits even more. The afore mentioned most likely replacement for Ben Bernanke, Janet Yellen, said in the same speech to the AFL-CIO, "I expect that discretionary fiscal policy will continue to be a headwind for the recovery for some time, instead of the tailwind it has been in the past," she continued. "... Fiscal austerity does raise unemployment, weaken the economy and ... in addition undermines the goals for which it is designed to achieve." Former President Bill Clinton is also exhorting larger government spending saying last week that, "Everybody that's tried austerity in a time of no growth has wound up cutting revenues even more than they cut spending because you just get into the downward spiral and drag the country back into recession."

With such huge pressure to increase government spending there is a real prospect of the U.S. producing deficits that continue to increase at far greater rates than GDP growth. This further strengthens the notion that the central bank will continue to monetize government debt in order to prevent interest rates from spiking and rendering the country insolvent.

In addition, because of the cheap cost of money and huge buildup of the monetary base in the U.S., the money supply growth rate as measured by M2 is up 8% YOY. And the Japanese money supply should also be booming soon, as their monetary base was up 10.9% YOY in January.

Finally, central banks have become net buyers of gold instead of net sellers. According to Bloomberg, before the credit crisis began central banks were net sellers of 400 to 500 tons a year. Now, led by Russia and China, they're net buyers by about 450 tons. That isn't news. However, the news is what Russia is now saying about fiat currencies. Vladimir Putin's regime is actively downplaying the dollar's role as the de facto world's reserve currency by saying last week, "The more gold a country has, the more sovereignty it will have if there's a cataclysm with the dollar, the euro, the pound or any other reserve currency," said Evgeny Fedorov, a lawmaker for Putin's United Russia party in the lower house of parliament. Putin's Russia has added 570 metric tons of gold in the last decade.

All of the chatter about gold entering a bear market is patently false. Instead, every bullish fundamental behind a strong bullion market is currently in place--and if anything those factors are becoming even more pronounced each day. Currency cold wars, massive debt accumulation, negative real interest rate levels, rising inflation targets, central bank bullion purchases, rising money supply growth rates and the tenuous condition of the dollar as the world's reserve currency; all lead to the conclusion that gold is nearing the end of a long consolidation inside a secular bull market, and readying for the next major move to new all-time highs.

Respectfully,

Michael Pento
President
Pento Portfolio Strategies
www.pentoport.com
mpento@pentoport.com

Twitter@ michaelpento1
(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.
               
Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 
       
Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Michael Pento graduated from Rowan University in 1991.
       

© 2013 Copyright Michael Pento - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife