Last year, I thought that there was the possibility that the anticipated currency crisis would begin. I predicted a surge in the price of gold at year end. The conditions were ripe for it, but for a variety of reasons it did not occur. Principle among those reasons is deflation. Deflationary pressures were and are intense. Massive stimulation by most central banks, and mind bending injections of liquidity are holding deflation at bay.
Stagflation is possible under that circumstance, but the Federal Reserve, Treasury, and other allies also managed to dampen the fall of the dollar. Part of the relative stability in the dollar is the cooperation between central banks. No country wants an appreciating currency to dampen exports.
Asians and particularly China are in a bind. They have massive holdings of dollar backed securities. They also have a need for continued exports, although their western markets are substantially weakened because of the recession. Internal consumption and stimulation proceeds apace, but it is unlikely to replace exports over the medium term.
In sum, the conditions this year are much more unstable than last. US deficits, and currency printing are massively higher. At high levels, Chinese officials have condemned the failure of US financial governance. The top financial official was quoted as saying “we hate you guys” in reference to the risk to their dollar holdings.
China is reducing its exposure to the dollar by aggressively acquiring all sorts of commodities and resource producing companies. But they continue to avoid direct attacks on the dollar to protect their large dollar holdings. But the indirect attacks are rising.
Many (including me) believe that the price of gold and silver are aggressively manipulated. Four bullion banks hold more than 50% (and growing) of the short position on the Comex. In the past month, China has begun an aggressive campaign to encourage citizens to buy precious metals. It is working. Over the past 15 years, central banks have been active sellers of gold. Those programs are coming to an end. Some, like Russia, are major new buyers of gold. Metal buyers can ultimately overrun the major bullion bank shorts by taking delivery on the Comex. This would happen despite the almost infinite financing available to the shorting banks. Shorts would have to buy the metal, and it is simply not available in the quantities needed. The metals exchanges could default.
The last hurrah for gold shorts may be coming up. The IMF is predicted to sell 400 tons of gold next week. The market reaction is key. China and Russia are rumored to be buyers of the full amount. The short term market is setup for a hard sell-off. But the price decline may be sharp, and only last a few hours. Or there may be no decline at all. If the price of gold is over $1000 by October 1, 2009, there should be a price explosion. My $2,000 per ounce forecast for December of last year will have been one year early. The citizens of the world are on the verge of fleeing fiat currency. As usual, gold and silver stocks are the best play.
The payback for our failure to manage tax and spend could be at hand.