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Investors Dump U.S. Dollars and Fiat Currencies For Gold

Commodities / Gold & Silver Nov 25, 2008 - 11:21 AM GMT

By: Ned_W_Schmidt

Commodities Best Financial Markets Analysis ArticleThe superiority of returns on Gold to investors over the miserable returns on paper equities would seem at some point to become an embarrassment to the purveyors of Stock Certificates of Negative Return. While US$Gold is down from the high, so many other investors, living in other currencies, around the world have witnessed their Gold trading at all time highs. And now the message of financial salvation is spreading further. Stories of shortages of Gold coins are now widespread. Public participation in a market is sign of Wave V, which now may be unfolding.


Central banks, led by the Federal Reserve, are busy monetizing every item of debt possible. The balance sheet of the Federal Reserve, adjusted for circular transactions, is now 95% larger than prior to the financial meltdown. U.S. Congress, with encouragement from Obama’s team, is now talking about a $500-700 financial stimulation plan. Deficit of U.S. government over the past year is already in excess of $1.5 trillion. The additional debt necessary to finance a stimulus plan can only be financed by (1) gullible foreign investors, (2) foreign central banks, or (3) by Federal Reserve.

With foreign central banks needing to refinance their own institutions and stimulate their own economies, they may have little appetite for more U.S. government paper. Paper that may soon be downgraded to AA. As a consequence, the Federal Reserve will have little choice but to monetize most of this additional half trillion dollars of debt. The ramifications of further expansion of the Federal Reserve’s balance sheet should not be ignored.

With the Fed’s balance sheet approaching a double in size, U.S. money supply, M-1 SA, is already growing at a 25-30% annual rate. “Printing money” at that rate can only lead to a loss of purchasing power. Anyone expecting an increase in general purchasing power of the dollar, monetary deflation, is simply on the wrong track. Gold is the only historical defense against the coming dollar debacle. The financial risks combined with the most populist President in U.S. history, and perhaps the most inept since Wilson a hundred years ago, make Gold an absolute necessity for protecting wealth.

Some weeks ago the above chart was introduced in somewhat different format. The red line, using the left axis, is the inflationary component of U.S. money supply growth over the past six months. The green line is price of $Gold, and uses the right axis. Black triangles are buy signals on $Gold created from the inflationary money supply growth rate. Those signals occur when the inflationary money growth is negative and then turns positive.

These signals, while from a model not intended to be a precise timing model, suggest another good time ahead for Gold investors. In the past four plus years it has only given three other signals. Investors should not ignore the coming threat of excessive money creation, and buy Gold on all price weakness or dips. Wealth once lost to the tyranny of money, is never regained!

By Ned W Schmidt CFA, CEBS

Copyright © 2008 Ned W. Schmidt - All Rights Reserved

GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report , monthly, and Trading Thoughts , weekly. To receive copies of recent reports, go to http://home.att.net/~nwschmidt/Order_Gold_EMonthlyTT.html

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