October 2, 2022

Gold Will Benefit From The Coming Currency Turmoil

By:  Axel Merk, Merk Investments

Sidetracked by the discussion over the “fiscal cliff” and possibly a New Year’s hangover, it’s time to face 2013 in earnest. Is the yen doomed? Will the euro shine? What about Asian and emerging market currencies? Will gold continue its ascent? And the greenback, will it be in the red?

Before we look too far forward, let’s get some context:

  • “Central banks hope for the best, but plan for the worst” was our theme a year ago. With everyone afraid of the fallout from the Eurozone, printing presses in major markets were working overtime. We argued this would benefit currencies of smaller countries – be that the so-called commodity currencies or select Asian currencies – that feel less of a need to “take out insurance.”
  • While we were positive on the euro when it approached 1.18 versus the U.S. dollar in 2010, arguing the challenges are serious, but ought to be primarily expressed in the spreads of the Eurozone bond market. Then in the fall of 2011, we grew increasingly cautious because of the lack of process: just as it is difficult to value a company if one doesn’t know what management is up to, it’s difficult to value a currency if policy makers have no plan. In the spring of 2012, when we were most negative about the euro, we lamented the lack of process in a Financial Times column. European Central Bank (ECB) chief Mario Draghi appeared to agree with our concerns, imploring policy makers to define processes, set deadlines, hold people accountable. After his “do whatever it takes” speech in July 2012, he took it upon himself to impose a process on European policy makers in early August 1. We published a piece “Draghi’s genius” where we called for a bottom in the euro. We were inundated with negative feedback in the immediate aftermath of our analysis from professional and retail investors alike, confirming that were not following the herd, nor buying something that’s too expensive.
  • While we liked commodity currencies in the first half of the year because of printing presses in larger economies working overtime, we grew a little cautious as the year moved on, partly because of valuations. Each commodity currency has its own set of dynamics, as well as their own Achilles heel: in the case of the Australian dollar, we had some concerns about its two tier domestic economy (not all of Australia was benefiting from the commodity boom), but also about the perceived slowdown in China.
  • We studied the Chinese leadership transition with great interest; while 2012 may have been a year in transition, more on the dynamics as we see them play out below.
  • Back in the U.S., we squandered another year to get the house in order. The fiscal cliff was a distraction; we need entitlement reform to make deficits sustainable. Europeans have no patent on kicking the can down the road. But unlike Europe, the U.S. has a current account deficit, making it more vulnerable should investors demand more compensation to finance U.S. deficits (that is, higher interest rates).
  • Japan: the more dysfunctional the Japanese government has been, the less it could spend, the less pressure it could exert on the Bank of Japan. Add to that a current account surplus, and all this “bad news” was good news for the yen. Countries with a current account surplus don’t need inflows from abroad to finance government deficits; as a result, the absence of economic growth that keeps foreign investors away is of no detriment to the currency. Conversely, countries with current account deficits tend to pursue policies fostering economic growth to attract capital from abroad. However, in late 2012, we published a piece “Is the Yen Doomed?” What happened? Japan was about to have a strong government. More in the outlook below.

We believe the currency markets are well suited for decision-making based on macro-analysis. Just as throughout 2012 the themes were evolving, please keep in mind that our 2013 outlook may be outdated the moment it is published, as we update our views based on new information or a new analysis of old information. Still, those who have followed us over the years are well aware that we like to shift our views within a framework. Please consider our 2013 outlook in this context:

  • We believe the yen is indeed doomed. We remove the question mark. Prime Minister Abe’s new government sets the stage, but key to watch are:
    • Abe’s government will appoint the three top positions at the Bank of Japan, as the governor and both deputy governors retire. Recent appointees have already been more dovish. Japanese culture is said to prefer talk over action, but the time for dovish talk may finally be over (despite their dovish reputation, the Bank of Japan barely expanded its balance sheet since 2008; in many ways, of the major central banks, only the Reserve Bank of Australia has been more hawkish).
    • Japan’s current account is sliding towards a deficit. That means, deficits will start to matter, eventually pushing up the cost of borrowing, making a 200%+ debt-to-GDP ratio unsustainable.
    • Abe’s government is as determined as it is blind. Abe believes a major spending program is just what Japan needs. As far as the yen is concerned, Abe may be getting far more than he is bargaining for.
    • But isn’t everyone negative on the yen already? Historically, it’s been most painful to short the yen; as such, many have not walked their talk. We expect some fierce rallies in the yen throughout the year. Having said that, the yen looks a lot like Nasdaq in 2000 to us. Not as far as technicals are concerned, but as far as the potential to fall without much reprieve.
  • The euro may be the rock star of 2013. Boring is beautiful. Sure, there are plenty of problems, but the euro is morphing into yet another currency, but is still priced as if it had a contagious disease. While the Fed, the Bank of England, the Bank of Japan are all likely to engage in further balance sheet expansion (we refer to it as “printing money” as assets are purchased by central banks, paid for by entries on computer keyboards, creating money out of thin air), there’s a chance the ECB balance sheet may actually shrink. That’s because some banks have indicated they will pay back early part of the €1 trillion in 3-year loans taken from the ECB. Some suggest the ECB might print a boatload of money should the “Outright Monetary Transaction” (OMT) program be activated to buy the debt of peripheral Eurozone countries. Keep in mind that the OMT program would be sterilized, likely by offering interest on deposits at the ECB. As such, the OMT would lower spreads in the Eurozone and, through that, act as a massive stimulus. In our assessment, however, such a stimulus is far less inflationary than central bank action in other regions. It’s no longer a taboo to be positive on the euro, but most we talk to are at best “closet bulls.”
  • The British pound sterling. The Brits are getting a new governor at the Bank of England (BoE) in the summer, the current head of the Bank of Canada (BoC), Carney. One of the first speeches Carney gave after his appointment was made public was about nominal GDP targeting. Carney will have a chance to replace many of the current BoE board members. That’s the good news, as the old men’s club is in need of a makeover. The not-so-good news is for the sterling. British 10 year borrowing costs have just crossed above those of France. We’ll monitor this closely.
  • As the head of the BoC, Carney was particularly apt at talking down the Loonie, the Canadian dollar, whenever it appeared to strengthen. If Macklem, his current deputy, is appointed, we may get a real hawk at the helm of the BoC. We are positive on the Loonie heading into 2013, but will monitor developments closely, as there are economic cross-currents that, for now, Canada appears to be handling very well.
  • Staying with commodity currencies, we are cautiously optimistic on the Australian dollar (China better than expected; monetary policy more hawkish than priced in) and New Zealand dollar (more hawkish monetary policy on better than expected growth). We continue to stay away from the Brazilean real and leave it for masochistic speculators looking for excitement.
  • We are positive on Norway’s currency (joining the above mentioned rock star, with greater volatility), yet cautious on Sweden’s (priced to perfection is not ideal when things are not perfect, even in Sweden).
  • China: the new leadership has indicated that liquidity for the Chinese yuan may be their top currency priority. That’s great news, as we believe it implies policies that attract investment, not just from the outside, but also with regard to a development of a more vibrant domestic fixed income market. We are more positive on China than many; more on that, in an upcoming newsletter (click to sign up to receive Merk Insights)
  • Korea, Malaysia, Taiwan: all positive, benefiting from both internal forces, but also beneficiaries of actions in other large economies. If we have to pick a favorite today, it would be Korea, but keep in mind that the Korean won is the most volatile of these currencies.
  • Singapore: we continue to like the Singapore dollar. A year ago, we started using it as a substitute for the euro (rather than using the U.S. dollar as the safe haven currency). The currency may well lag the euro’s rise, but the lower risk profile of the currency makes it a potentially valuable component in a diversified basket of currencies.
  • Gold. We expect the volatility in gold to be elevated in 2013, but consider it good news, as it keeps the momentum players at bay. We own gold not for the crisis of 2008, not for the potential contagion from Europe, but because there is too much debt in the world. We think inflation is likely a key component of how developed countries will try to deal with their massive debt burdens, even as cultural differences will make dynamics play out rather differently in different countries. Please see merkinvestments.com/gold for more in-depth discussion on our outlook on gold.

And what about the U.S. dollar? While much of the discussion above is relative to the U.S dollar, the greenback itself warrants its own analysis:

  • Investors in the U.S. should fear growth. The spring of 2012 saw the bond market sell off rather sharply as a couple of economic indicators in a row came out positively. Bernanke wants to keep the cost of borrowing low, but can only control the yield curve so much. That’s why, in our assessment, he is emphasizing employment rather than inflation, in an effort to prevent a major sell-off in the bond market before the recovery is firmly established. Growth is dollar negative because the bond market would turn into a bear market: foreigners’ love for U.S. Treasuries might wane, just as it historically often does during early and mid-phases of an economic upturn as the bond market is in a bear market.
  • Good luck to Bernanke to raising rates in 15 minutes, as he promised he could do in a 60 Minutes interview. Sure he can, but because there’s so much leverage in the economy, any tightening would have an amplified effect. At best, we might get a rather volatile monetary policy. But we are promised by the Fed that this is not a concern for 2013.
  • Both of these, however, suggest volatility will rise in the bond market. Remember what got the housing bubble to burst? An uptick in volatility. That’s because leveraged players, momentum players run for the hills when volatility picks up. And a lot of money has chased Treasuries, praised as the best investment for over two decades. We don’t need foreigners to sell their U.S. bonds for there to be a rude awakening in the bond market; we merely need a return to historic levels of volatility. Why is this relevant to a dollar discussion? Because a bond market selloff makes it more expensive for the U.S. to finance its deficits. Please see our recent analysis of the risks posed to the dollar by a bond market selloff for a more in-depth discussion on this topic.

Axel Merk is President and Chief Investment Officer, Merk Investments. Merk Investments, Manager of the Merk Funds.

Is The Gold Correction Over? A Technical Look At Gold, HUI And The U.S. Dollar

By Vin Maru

Gold Analysis

Looking at the gold chart below, we can see that gold has been correcting over the last two weeks. When applying some technical analysis to the gold chart, we can clearly see that there would have been overhead resistance at $1800 since most of the year gold has traded between $1550 and $1800. A few weeks ago, we also noticed a big build in the short position on the Comex’s Commitment of Traders report COT by the commercial and bullion banks. The effort to stop gold’s advance at a key resistance level was successful in part because of the huge increase in the short position at that level, which is why we knew to take some profits and that would be an ideal place for a correction to start.

Now that the correction has started and gold is giving back some of its gains from the summer, the question now remains: How much of a retracement will we see on the price of gold? While the shorts are currently in control of driving the price down, support will come from other central banks and buyers of physical gold.

With gold at $1701, it is currently (noon on Tuesday Oct. 24) sitting below the 50 dma at $1720 which is above the 200 dma at $1662. The first line of support for this coming week was at $1720 and if it holds above the 50 dma the correction in gold could be over. If we continue to see weakness in gold over the next week or two, we can expect the correction will continue later this month and going into elections. This is something I suspect could happen if the overall markets continue to remain week.

Looking at the chart we suspect that buying will come in at the new support price range at about $1650 (+ or – $20) if the 50 dma at $1720 doesn’t hold this coming week. One thing to note is that the 50 dma crossed above the 200 dma around the end of September, which is an over good sign. However it needs to remain above the 200 dma for this advance higher in gold to hold before it can go on to make new highs. We remain optimistic that gold will either bounce here at the 50 dma of $1720 or at a retest of the 200 dma of $1662, which would still be bullish over all. If you are looking to add to your physical gold holdings and diversifying them internationally, scaling in now and at the $1650 price range would be a good place to start adding to current or new positions. Keep in mind that the support at the 200 dma may not hold, which means the price of gold can retrace right back to longer term support at $1550 which has been in place all year. However, I give it a small probability that we will correct back to that price range as we are entering a seasonally strong part of the gold cycle in November and December.

While I hate making predictions on what the gold price will do short term, I suspect it could consolidate between $1650 – $1750 for the remainder of the year. While we are entering a stronger part of the gold season and the fundamentals are lined up to suggest higher prices, we have conflicting events such as a huge concentrated short position, the US elections, the US fiscal cliff and tax loss selling to deal with for the remainder of the year. With 2 strong opposing forces acting on one another, the price of the metal may consolidate around $1650 – $1750 for some time until either the bulls or bears clearly take this market in one direction or another. Until then, all we can do is sit around and wait for a clear break outside the trading range that has been established over the last year.

HUI Gold Miners Index Analysis

Just like gold, the HUI index is also correcting since September. Earlier last month, we thought index would trade to 520 before meeting resistance, which we can clearly see it has done and it is now in the process of correcting. It would not be unusual for the index to give back up to 50% of its recent gains from the summer lows. Back in July, it looks like a low of 385 was made on the index and a recent high of 525 was achieved back in September; this is a 140 point gain. So if the market was to give back 50% of this gain or 70 points, we can expect the HUI to retrace back to about 455, which would be the next best time to add to positions.

Currently the HUI is at 495 which is still above the 50 dma at 482 and the 200 dma at 465, which is a positive alignment if the index can hold these gains. One thing to pay attention to from the chart below is the price action on the HUI from April this past year to the end of August, a period called the summer doldrums. During this period support came around 385 and was tested 2 different times, while overhead resistance was at 450 which also was tested a couple of times. Back then 450 was overhead resistance which was finally broken with a strong move higher during September; we suspect this will now become the new support level while 520 will act as resistance.

While we still remain cautiously optimistic that a new uptrend has started longer term, the HUI will most likely correct back to the 460 range ( + or – 10 points) over the coming months and 520 will now act as overhead resistance as a new trading range will be set. In general, support around 465 (the 200 dma) is where we would look to initiate new positions in some of the senior producers and hold them going into the New Year. At some point, I do expect overhead resistance at 520 will be breached to the upside at which point the HUI index could run to 580 and higher, but that would mean gold would have to be on fire and trading above its overhead resistance at $1800 on a holding basis. Until then, the miners will probably trade in a range where the HUI fluctuates between 460 and 520 as long as gold stays above $1650.

US Dollar Analysis

While the US dollar is looking good at the moment and getting a nice little bounce higher lately, this could be very short lived. The up channel that has been in place from August 2011 to August 2012 has been clearly broken and now it has started a new down trend channel this past August.

All we are seeing is a current bounce from oversold levels on the RSI and MACD and it already seem to be stalling out. The US dollar could move slightly higher to test the 50dma of 80.38 or the top of the new down channel at 81, but the rally should stop there. One thing to note is that the 50 dma just crossed below the 200 dma in the last few days, that is not a good sign. Once this relief rally is over, the dollar should continue downward and possibly to the bottom end of this downward channel. This could mean a definitive move below recent support around 78 on the index, if this happens and support is broken, it could lead to a cascading move downwards towards 75 or possibly 73.75 as the next major support level. If the dollar does break down, gold and silver will shoot much higher.

The best hope for the US dollar is for it to sit in a channel between 78 and 81.50 which is where I think it could trade sideways for some time until we clear the elections and get some direction on fiscal policy from the Fed.  If the dollar goes sideways, G and S will also trade in a sideways channel. More than likely we will get some clear direction once the election are done.

 

If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader.   Also learn how you can purchase and protect your gold holdings by getting a copy of our special report Getting Your Gold out of Dodge or protecting the stock investments you currently own with Bullet Proof Shares.

U.S. Currency At No Risk Of Becoming Sound – Gold Has Spoken

Ben Bernanke tells us he wants a sound dollar and Barrack Obama tells us he wants to cut entitlements and reduce the budget deficit.

I have no doubt that both gentlemen are honorable and doing what they believe is best for the country.  Others, perhaps less naive than myself, may be inclined to believe that the Fed Chairman and President are attempting to foist a distorted view of reality on the American public.  Credibility can depend on the public’s perception of reality, a fact well understood by politicians and central bankers.

“If you tell a lie big enough and keep repeating it, people will eventually come to believe it.” – Joseph Goebbels, Propaganda Minister

“When it becomes serious, you have to lie”. – Jean-Claude Juncker, Euro Finance Minister

It’s not hard for politicians to fool the American public – they have had many decades of experience honing that skill.  It is another matter to fool the markets and using that scorecard , our dysfunctional and highly polarized government has failed miserably.  The gold market has not been fooled, holders of US dollars have not been fooled and the U.S. debt monster is visible to all.

Gold - courtesy stockcharts.com

US Dollar - courtesy stockcharts.com

 

After weeks of bitter debate, the best that the Washington elite could manage to do was agree to disagree at a later date and, of course, establish a commission to look further into the debt crisis, also at a later date.

The elegant solution to the nation’s debt problem, as described above, may finally allow John Q. Public to sleep more soundly at night.  Inquiring minds, however, can cite numerous reasons why the Nation’s debt crisis will be keeping all of us awake in the near term future.

-The ultimate compromise to the debt crisis will be more debt, following in the footsteps of the EU’s grand solution to the Greek debt crisis.  “I will gladly pay you tomorrow if you lend me more money today” attitude  is going to quickly wear thin with U.S. creditors.

-The U.S. is borrowing trillions to pump cash into a weakening economy that already can’t create enough income to service the debt we already have – this strategy is the ultimate Ponzi scheme.  The conviction that future economic growth will pay for today’s borrowings is false.  Burdensome levels of public sector debt have been proven to dramatically restrain future economic growth.

-The U.S. and world economies are looking at a replay of the 1930’s depression, except this one won’t be so gentle.  The American public, with the persuasion of politicians, has come to believe that the “richest nation on earth” can provide cradle to grave security based on mathematically impossible entitlement promises.  The financial chaos and social breakdown resulting from broken promises to pay by the government will severely test the foundations of our democracy.

-All of the proposed “solutions” to the country’s overwhelming debt problem involve increasing the national debt by trillions more and agreeing to phantom spending cuts at some point in the future.  The U.S. is on a debt treadmill and all of the political solutions coming out of Washington are equivalent to turning up the speed on  the treadmill and pouring oil on the belt.

-The Dodd-Frank Act, which was supposed to solve the problem of systemically risky institutions, ignored the biggest systemic risk of all to our financial future – the U.S. government.

-The Federal Reserve, which according to Bernanke, “saved  the entire world” from a depression in 2008, has strangely detached itself from the crisis by proclaiming that they are powerless and without policy tools to prevent the looming U.S. debt default.  (See this on Ron Paul’s view of the Fed).  If worse comes to worse, perhaps Bernanke should seek some advice from the insolvent States of California and Illinois on how to go about issuing vouchers.

Steve Forbes Joins Ron Paul’s Call For Gold Backed Currency

Steve Forbes, CEO of Forbes Magazine, said the U.S. should return to a gold backed currency to prevent further debasement of the U.S. dollar.  Mr. Forbes joins a growing chorus of intellectually honest Americans who view the Federal Reserve as the greatest danger to the American economy and way of life.

The quest to preserve the value of the U.S. currency and rein in the Federal Reserve has long been championed by Rep. Ron Paul.  Apparently, Ron Paul’s message is beginning to make sense to more and more Americans as they watch the purchasing power of their dollars decline daily.

http://youtu.be/3CG9UVagFQ0

Bloomberg is reporting that the public approval rating of Fed Chairman Bernanke has dropped to the lowest level in two years. Bernanke has an approval rating of only 30% compared to 41% in late 2009.  Bernanke’s response to every problem has been to lower interest rates and print money, which have done little to improve the fundamental financial health of consumers or the government.

According to Bloomberg, the public has grown increasing skeptical of increased debt and money printing since unemployment is still near 10%, home values are still in a free fall and the declining purchasing value of the dollar has lowered the standard of living for most Americans.  The Bloomberg Poll showed that a resounding two thirds of Americans think the country is on the wrong track, with 55% expecting their children to have a lower standard of living.

Professor Bernanke can wax eloquent on the benefits of “quantitative easing” but the average American is smart enough to know that a country that needs to print money to pay its bills is in desperate financial condition.

Steve Forbes noted that the ability of the government to print money encourages reckless spending since money can be created out of “thin air.”  According to Mr. Forbes, if the country returned to a gold standard, unlimited spending could not occur.  Ironically, the ability to expand credit and print money is exactly why the government abandoned the gold standard.  The concept of a Federal Reserve and a gold backed currency have become almost mutually exclusive concepts.

 

Zimbabwe Central Bank Chief Bashes U.S. Dollar While Promoting Gold Backed Currency

According to a news report in New Zimbabwe, the head of the Zimbabwe Central Bank is warning that the U.S. dollar may lose its reserve currency status soon and suggested that Zimbabwe institute a gold backed currency.

Central Bank Chief Gideon Gono said in an interview that  “There is a need for us to begin thinking seriously and urgently about introducing a Gold-backed Zimbabwe currency which will not only be stable but internationally acceptable.   We need to re-think our gold-mining strategy, our gold-liberalisation and marketing strategies as a country…to me, Gold has proven over the years that it is a stable and most desired precious metal.”

The irony here is overwhelming.   Zimbabwe, a country without a functioning currency due to hyperinflation is worried about the declining value of the U.S. dollar.  The Zimbabwe dollar has been worthless since 2009 and the Zimbabwe economy now functions through the use of foreign currencies, including the U.S. dollar.

The central bank of Zimbabwe had fueled hyperinflation the old fashioned way by trying to use printed money to pay government expenses.  The people of Zimbabwe were not fooled and the currency soon lost all value.  A $100 trillion dollar Zimbabwe bank note is now a novelty item on EBay, going for about $7 each.

$100 Trillion Dollar Zimbabwe Note

The U.S. dollar must be in real trouble if officials of Zimbabwe are worried about accepting U.S. dollars.   Zimbabwe central bank officials have had first hand experience seeing how quickly a paper currency can become worthless.

According to Central Bank Chief Gono, “Zimbabwe is sitting on trillions worth of gold-reserves and it is time we start thinking outside the box, for our survival and prosperity.  The world needs to and will most certainly move to a gold standard and Zimbabwe must lead the way”.

How ironic would it be if the Central Bank of Zimbabwe winds up with the world’s strongest currency by introducing a gold backed currency?

iShares Silver Trust and SPDR Gold Trust Holdings Increase As Worries Over Paper Money Grow

Both the iShares Silver Trust (SLV) and the SPDR Gold Shares Trust (GLD) saw holdings jump on the week as precious metal prices continued to climb.

The holding of the SLV increased by a substantial 213.98 tonnes over the past week after posting a decline of 192.74 tonnes in the previous week.  The all time record holdings of the SLV was reached on April 11, 2011, at 11,242.89 tonnes.

Strong investment and fundamental demand for silver continued to push silver prices higher with the London PM Fix Price for silver closing yesterday at $44.79, up from $40.22 a week ago.

While some analysts worry about the “inflation” in silver prices, the world’s most successful investor is worried about dollar inflation.  Warren Buffet – “We’re following policies that will lead to a lot of inflation down the road unless changes are made”.  The U.S. can’t “run the kind of deficits we’re running and other policies…without it being enormously inflationary”.

The SLV currently holds 359.6 million ounces of silver bullion valued at $16.1 billion.  The SLV has seen seen an astonishing increase in the value of its holdings.  At the Trust’s inception in April 2006, silver holdings of 653.17 tonnes were valued at $263.5 million.

GLD and SLV Holdings (metric tonnes)

20-April-2011 Weekly Change YTD Change
GLD 1,230.25 +17.29 -50.47
SLV 11,183.69 +213.98 +262.12

Gold holdings of the SPDR Gold Shares Trust increased on the week by 17.29 tonnes to a total of 1,230.25 tonnes, after an increase of 7.49 tonnes in the previous week.  The GLD now holds a total of 39.6 million ounces of gold valued at $59.4 billion.

Gold continued to gain this past week and, as measured by the London PM Fix Price, closed yesterday at an all time high of $1,501.00.  Gold has gained $43.50 over the past week and since the beginning of the month is up $83 per ounce or 5.8%.

The price gains in gold continue to confound the numerous skeptics of the golden metal who can’t understand why gold is going up in the absence of high rates of inflation.  Perhaps the skeptics should pay attention to the increasingly vocal concerns by governments holding large reserves of U.S. dollars and whose economies are being harmed by the flood of rapidly depreciating U.S. dollars.

COLLAPSING US DOLLAR - COURTESY STOCKCHARTS.COM

Nyet to diplomacy. In extremely blunt remarks, Russian Prime Minister Vladimir Putin, commenting after the S&P downgrade on the U.S. debt outlook, said:  “Look at their (the U.S.) trade balance, their debt and budget.  They turn on the printing presses and flood the entire dollar zone – in other words, the whole world, with government bonds.  There is no way we will act this way anytime soon.  We don’t have the luxury of such hooliganism”.   Nor is Mr. Putin simply talking tough – the Russian government is also acting to protect its financial interests by reducing their holdings of U.S. treasury debt.  Russia, the world’s third largest holder of U.S. debt has been greatly reducing its dollar holdings this year.

China, the world’s largest holder of U.S. dollars totaling a massive $3 trillion, has been expressing its frustrations and concerns with U.S. monetary policy for years.  A plunging US dollar reduces the value of US debt held by China.  To offset the losses from holdings US paper assets, China has been reducing its holdings of U.S. dollars and buying physical assets worldwide.  China also took major steps this week to gradually implement full convertibility of the yuan in world markets which would allow it to hold fewer US dollars.

Governments worldwide are taking major steps to reduce loss exposure from holding US dollars that can be printed in the trillions by the U.S. Federal Reserve.  In another sign of disgust towards U.S. fiscal and monetary policies,  Brazil, Russia, India, China, and South Africa recently agreed to use their own currencies among themselves instead of the U.S. dollar.

The result of ultra loose U.S. monetary policies, huge budget deficits and money printing by the Federal Reserve have all contributed to the flight to wealth preservation as reflected by a collapsing US dollar and skyrocketing precious metals prices.

Ten Reasons Gold Is Not Above $1,000

Gold reached its all time high price above $1,000 per ounce a few days after the shocking Bear Stearns bailout. In the following months gold often experienced sharp declines and has stubbornly refused to reattain the key $1,000 level despite more shocking bailouts, bank failures, and bankruptcies.

Reporters, analysts, and bloggers have cited a variety of reasons why gold has not exploded higher amidst the ongoing turmoil. Some of the reasons are more valid than others, but all are worth examining. Without further ado, the Gold and Silver Blog brings you the Top Ten Reasons Gold Is Not Above $1,000:

1.) Dollar Strength

Against nearly every world currency, the US Dollar has been strengthening. The Dollar’s path higher has accelerated in recent weeks. Gold is thought of as a weak dollar play. With the dollar strengthening, selling gold is simply the other side of the trade.

2.) Commodity Collapse

Since the summer months, commodities have been on the rapid decline. Oil has fallen by more than half from its peak price of $147. Base metals and precious metals have experienced similar if not more drastic declines. While gold has been holding up well on a relative basis, the weakness in commodities may be keeping any price appreciation at bay.

3.) Deleveraging

After years of using excessive leverage in an attempt to maximize returns, firms are rediscovering the notion of risk. Massive deleveraging is taking place as firms sell any asset available to pay down debt. As an asset class, gold is not immune to such sales.

4.) Speculative Selling

With the dollar rallying and gold breaching key technical levels, traders may be taking speculative short positions in gold, anticipating that prices will continue to move lower. This speculative selling compounds the impact of selling taking place for other reasons.

5.) Recession

Fears of a worldwide economic slowdown and deep domestic recession will have a big impact on consumer discretionary purchases. This would likely hold especially true for luxury items such as jewelry.  Since jewelry production is the largest non-investment use for gold, any slowdown would put a drag on demand.

6.) Deflation

While some fear inflation, others fear deflation. If prices decline across the board, some believe that all asset classes will be dragged down, including gold. Notably some people take the exact opposite position about gold and deflation.

7.) Hedge Funds and Mutual Funds

Some people feel that hedge funds had a hand in driving the price of gold from below $300 to above $1,000. Now that fortunes have turned for their other investments, hedge funds are being forced to unmercifully liquidate large positions in gold. Mutual funds are also being forced to liquidate positions in gold to meet redemptions.

8.) “George Costanza Trade”

On Seinfeld, George Costanza realized that every decision he ever made has been wrong. He discovered if he did the exact opposite of what his instincts told him to do, he would be successful. In relation to investing, when everyone believes that a certain trade or investment philosophy is certain to work, oftentimes with uncanny precision the exact opposite happens. This year, a growing number of people began to believe with absolute certainty that gold would move higher. While the opinion was far from universal, was the opinion widespread enough to invoke George Costanza?

9.) Government Manipulation

There is a growing camp which believes that the primary reason that gold has not moved higher in a big way is due to government manipulation. If gold prices skyrocketed, the public at large would lose faith in fiat currencies and start to panic. It would be in the government’s best interests if this did not happen.

10.) These Things Take Time

Some of the forces mentioned above are going head to head with the economic realities that should be driving the price of gold higher. Eventually we will reach a tipping point when demand for physical gold is enough to overwhelm all other factors. Once we reach that point, the price of gold will rise in leaps and bounds.