Best of the Week
Most Popular
1.Scottish Independence YES Vote Panic - Scotland Committing Suicide and Terminating the UK? - Nadeem_Walayat
2.Independent Scotland Will Disintegrate as Unionist Regions Demand Referendum's to Rejoin UK - Nadeem_Walayat
3.Bank of England Panic! Scottish Independence Bank Run Already Underway! - Nadeem_Walayat
4.Gold and Silver Price Ready To Go BOOM - Austin_Galt
5.Gold and Silver Potential Price Meltdown Scenario - Rambus_Chartology
6.Scottish Independence UK Catastrophe - The Balkanisation of Britain - Video - Nadeem_Walayat
7.The Price Of Gold And The Art Of War Part I - Darryl_R_Schoon
8.Main Reason Why Scotland Will Vote NO to Independence, 70% Probability - Nadeem_Walayat
9.Heavy Gold and Silver Shorting is Bullish - Zeal_LLC
10.10 Year U.S. Treasury Short Best Place to be Remainder of 2014 - EconMatters
Last 5 days
Scottish Independence Bank Run Already Underway - Video - 16th Sept 14
The Emergence of the US Petro-Dollar - 16th Sept 14
Economic GDP Drives Stock Prices Inestment Myth - 16th Sept 14
Don't Miss This Gold Buying Opportunity - 16th Sept 14
Why ECB QE Is Bearish For Gold Prices - 15th Sept 14
Property Rights and Property Taxes—and Countries That Don’t Have Them - 15th Sept 14
Junior Miners Breaking Out Higher Forecasting Gold and Silver Price Bottom? - 15th Sept 14
Stock Market Patiently Waiting for Mean Reversion - 15th Sept 14
A Closer Look at the US Dollar - 15th Sept 14
The Silver Price Sentiment Cycle - 15th Sept 14
Stock Market Correction Underway - 15th Sept 14
Marc Faber - “I Want To Be Diversified, I Want To Own Some Gold” - 15th Sept 14
The Myth of Nuclear Weapons - 15th Sept 14
US Dollar Forecast to Go Much Higher - 15th Sept 14
Analysis And Price Projection Of The Uranium Market - 15th Sept 14
Bank of England Panic! Scottish Independence Bank Run Already Underway! - 15th Sept 14
The Ethics of Entrepreneurship and Profit - 14th Sept 14
The Big Investor Opportunity in the Orbital Space Junkyard - 14th Sept 14
Kohl's and The Rest of The Retailers are in Deep Doo Doo - 14th Sept 14
Independent Scotland Will Disintegrate as Unionist Regions Demand Referendum's to Rejoin UK - 14th Sept 14
Stock Market Pullback Continues - 13th Sept 14
SNP Fanatics Warn of Day of Reckoning for Scottish Independence No Campaigners - 13th Sept 14
Scottish Independence Would Shake Up the Global System - 13th Sept 14
The World Order Becomes Disorder - 13th Sept 14
Is Geothermal Power About to Become The Next Great Battleground Over Fracking? - 12th Sept 14
Heavy Gold and Silver Shorting is Bullish - 12th Sept 14
Strong U.S. Dollar Undermines Gold and Silver - 12th Sept 14
Debt And The Decline Of Money - 12th Sept 14
Panic On The Streets Of London ... Can Scotland Ever Be The Same Again? - 12th Sept 14
Will The Real Silver Commercials Stand Up? - 12th Sept 14
If You Own Only One Investment, Make Sure This Is It - 12th Sept 14
Main Reason Why Scotland Will Vote NO to Independence, 70% Probability - 12th Sept 14
Better Days Ahead For U.S. Stock And Housing Market - 12th Sept 14
U.S. Meddling Dims Prospects for Ukraine Peace - 12th Sept 14
Is the Fed Preparing to Asset-Strip Local Governments? - 12th Sept 14
China Holds “Gold Congress” - Positioning Itself As Global Gold Hub - 11th Sept 14
Fire Ice Could be Energy's Magic Bullet or a Planet-killing Catastrophe - 11th Sept 14
The Mass Psychosis Of 9 /11 Will Never Be Healed - 11th Sept 14
Radical Islam's Crisis of Competing Caliphates - 11th Sept 14
Ukraine Crisis And Self-Determination - 11th Sept 14
Cameron and Miliband Desperately Attempt to Prevent Scotland Committing Suicide - 11th Sept 14
A Supply Crunch Points to Higher Uranium Prices - 11th Sept 14
The Myanmar Shadow - 11th Sept 14
Europe Takes the QE Baton - 11th Sept 14
Full Frontal Inflation - 11th Sept 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Huge Stocks Bear Market

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

© 2005-2014 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

Free Report - Financial Markets 2014