Dark Skinny

So what have we got left? Hope? The financial infrastructure and markets have trashed, there is no stability in the markets at all now - market volatility is the only constant, up and down like a bloody yo-yo. So what can you do as an individual to protect yourself financially? From my readings and study, the US markets are no longer obeying the rules of the Dow Theory, Value Investment principles, Elliot Wave theory or any other technical investment theory. Even Warren Buffet’s ultra-safe Berkshire Hathaway stock is down over 48% - and has now lost its AAA rating - it seems nothing is apparently safe now. So I guess investing in stocks is out then.

Currently we have a new government that is still determined to spend, spend, spend its way out of this fierce crisis, still desperately trying to prop up the old consumer/debt regime for the sake of the financial markets(what else can you expect with Tim Geithner and Larry Summers in charge), whose new government still supports Wall Street Bailouts and the ridiculous “trickle down” effect to Mainstreet. And where is the much promised financial regulation? It’s as if the US government’s fiscal policy needle is stuck hard and fast in only one type of Keynesian or Monetarist debt groove, never mind whether a Democrat or Republican is at the helm.

So forget party politics - don’t waste your time - think about your own personal financial survival instead. Here are some good reasons why the US Dollar will soon fail and drop like a stone in value:

• The Dollar is artificially strong at the moment. How can this be? - All fiat currencies, including the dollar are now each valued against their country’s economic performance and GDP. And how’s the American economy doing right now? The only reason everyone has run to US Treasuries is because they are guaranteed by the US government - the only government that creates money out of nothing. And two year T-Notes currently only give about 1% interest and 10 year T-Notes only give 2.9% interest. Are you kidding me? Between 2002 and 2008 - during the Bush Administration - the Dollar was inflated heavily in only six years,  devaluing its worth by about 50%.  Hmmm…Gosh is somebody trying to inflate away America’s Debt then? And you’re perhaps wishing that the likes of China, Japan, Europe, Russia, India and The Middle East - all very large holders of US Treasuries - won’t  notice this very unsubtle and unfair US government play? Right.

• For all those who still desperately maintain that the likes of Asia, The Middle East and Europe all need the US markets, well, all I can say is - at what price? While this US Fiscal Debt - currently at $65 trillion -  continues to go galactic, this means that for America to sustain both her debt and consumerism - she will need all the dollar reserve holding nations to buy more and more and more poor paying US Treasuries at an ever increasing rate. And so far India, Russia, China and the Middle East have substantially cut back on their amount and rate of purchase of US Treasuries. How will this affect the Dollar?

• For some time now, the US govt has been manipulating and suppressing the real value of gold against the dollar. Gold has always been the main enemy of the US dollar. And apart from this, The Fed continues to manipulate oil and bonds as well. But due to the recent rise in gold - due to major purchases from the Mid-East and China - gold is now getting too expensive, and beyond the manipulations of The Fed.

• Between Oct 2008 and now, gold has gone up by 20% in value against the dollar because both China and the Middle East have been purchasing gold. China has recently expressed a wish to purchase 4,000 tonnes of gold - this is a phenomenal amount of gold - and represents half the gold held by the US who are the largest holders of gold reserves in the world. And China will most likely pay for this gold with her reserve dollars and US Treasuries.   China will soon be opening up her yuan and introducing this currency as the Asian reserve currency and has been purchasing gold(using her reserve dollars) to give the currency some real value and strength. Meanwhile Saudi Arabia, Kuwait, Bahrain, Qatar, and the United Arab Emirates will introduce the new “Khaleeji” currency in this middle east region by 2010 - with Oman and Yemen to join the GCC  at a later date. This currency is to be fully backed by gold - $3.5 billion in gold has already been purchased for this purpose. It seems that the US Dollar will have little use in the Asia or Middle East regions soon. All this is very bad for the dollar.

• Russia hasn’t used the US Dollar in its oil and gas trading for some years now.

• Ten further threats to the dollar.

The fate of both US and European currencies will be similar. All the major fiat currencies are likely to depreciate in value by large amounts if the dollar falls. So it doesn’t matter if your in dollars, euros or pounds sterling - they will all fall with the dollar - because all countries hold large quantities of US Treasuries and dollar reserves - which is counted as a measurable asset against their own fiat currencies.

So what can you do as an individual? How can you preserve the ’store of value’ of your own money ? What about buying gold? I’m not talking here about buying mining stocks or paper gold(ETFs) or leased gold, I’m talking about physically owning the bright, shiny, yellow stuff - gold bullion.

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The red line in the above graph shows the stability of gold’s ’store of value’ relative to oil. The blue line represents the extreme volatility of dollar value against oil and therefore against gold. This volatility began in 1971, when Nixon removed the gold standard from the dollar - and all the major world currencies suddenly became fiat as well.

As you can see, gold doesn’t go up or down much in its store of value because its supply and demand dynamics stays relatively constant. But on the US dollar side - there is much volatility due to heavy US govt and market interference and manipulation - using large and complex currency plays. Do you remember how George Soros bet against the UK pound over twenty years ago and brought down both the pound(£) and  the Thatcher government in the process? One single man was able to cause this by betting against the British pound on the exchange markets. This would never have been possible if the pound sterling had been fully and physically backed by a gold reserve.

So, how do you feel about fiat currencies now - particularly in all this economic uncertainty?

What I am now considering is purchasing an amount of gold bullion through the internet. This will be a purely defensive play by me. I am certainly not trying to make any money here - I am just trying to preserve the current ’store of value’ of my savings by buying gold bullion online. I would also advise that if you are an American and are considering doing this - choose an area of storage for your gold that is outside the US(offshore) - just in case the US government passes a law allowing the confiscation of all physical gold from its citizens in the future(as Roosevelt did in the 1930s). This seems quite likely to happen, since Obama is already going after major international tax havens in his desperate search for extra taxes and more money.

Remember that gold - as the ultimate ’store of value’ asset benchmark - is like any other commodity and only goes up and down in value on its own according to its supply and demand dynamics. And since the store of value of gold has been so stable for so many years, the only way gold can appear to go ‘up’ substantially is if the the US Dollar value tanks, thus only elevating the value of gold in terms of the devalued US dollar.