EurAnalysis

How Helicopter Ben Helps Jobs and, Inadvertently, Gold

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

http://www.usfunds.com/media/images/...icopterBen.jpg

The world’s central bank leaders continue to spike the monetary punch bowl, with investors imbibing on gold once again. This flurry of gold buying prompts many curious investors and doubting media to ask me two questions: 1) How can demand for gold and gold stocks continue; and 2) How high can the precious metal go?

To answer these questions, we need to look at the intentions behind the economic and political decision-making across several developed countries, analyze the causes, the effects, and the possible ramifications.
For example, one of the most debated topics today is America’s ongoing unemployment situation. Job loss has affected the lives and pocketbooks of millions of Americans and our friends and families, culminating to a center-stage position in the election this year. All eyes turn to President Barack Obama and Mitt Romney to explain how each intends to create jobs.

During the two years following the Great Recession, Americans lost jobs at a similar rate to the employment losses during the Great Depression and in Finland after 1991. But two years after the crisis, U.S. employment losses stopped and reversed direction.

Compare this to the situations in Norway, Spain, Finland and Sweden, each of which had prolonged unemployment. After Norway’s financial crisis in 1987, it took 8.5 years to return to the country’s employment peak. It took 13 years for Spain’s employment to return to its 1997 peak. For Finland and Sweden, it took more than 17 years following their 1991 peaks.

http://www.usfunds.com/media/images/...oymentLoss.gif

Although the job losses in the U.S. don’t seem as dismal, “Helicopter” Ben Bernanke wants to avoid Europe’s and Japan’s catastrophic situations. To him, the economy “has not been growing fast enough recently to make significant progress in bringing down unemployment.

In a speech to the Economic Club of Indiana on October 1, Bernanke explained that the Fed is “charged with promoting a healthy economy,” which includes “an economy with low unemployment, low and stable inflation, and a financial system that meets the economy’s needs for credit and other services.” With regards to the decisions relating to monetary policy, the Fed’s goals are dictated by Congress and are to seek “maximum employment and price stability.” He explains, “We would like to see as many Americans as possible who want jobs to have jobs and that we aim to keep the rate of increase in consumer prices low and stable.”
Ten years earlier, Ben hinted at the way he might accomplish such goals as a Fed chairman. In a speech regarding deflation, he shared his position on a government’s means to print money, referring to Milton Friedman’s comment about dropping money out of a helicopter into the economy. He stated, "The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost." Since then, he’s been known as "Helicopter Ben."

With unemployment continuing, the Fed’s helicopter drops another $40 billion per month to buy mortgage-backed securities, as well as an additional $45 billion of longer-term securities per month through the end of the year.


And, as Bank of America-Merrill Lynch says, “monetary policy is contagious.” The Fed’s money printing practice to help create jobs is only one part of the picture. Along with the growing U.S. monetary base, global liquidity has been growing every year for the past 12 years. As you can see, both of these factors have a close correlation to the rise of gold.

http://www.usfunds.com/media/images/...y-10052012.gif

While well-intentioned, I believe these “quantitative infinity” programs may have a devastating devaluing effect on currencies, which has helped to spur gold prices over this entire time period.

Gold investors have recognized this correlation by returning to gold en masse. In August, investors rushed into gold, with the massive inflows of money going into the gold exchange traded products in August more than each of the prior five months.

Buying continued in September, with gold lovers loading up on coins. According to Bloomberg, people purchased the most American Eagles from the U.S. Mint in eight months. Almost 70,000 ounces were sold last month—the most sold since January when the U.S. Mint sold 127,000 ounces.

Miners also attracted interest, with the FTSE Gold Mines Index experiencing a rise of 13.25 percent and the NYSE Arca Gold Miners Index rising 12 percent during the month of September alone.

So how high can gold go? If you factor in only the Fed’s program to purchase mortgages and Treasuries, Bank of America-Merrill Lynch says that over the next nine months gold could go to $2,000, and by the end of 2014, gold could be at $2,400.

http://www.usfunds.com/media/images/...lanceSheet.gif

This target doesn’t take the Love Trade into consideration. Over the past several months, we’ve heard only chirping crickets from India, the country that has historically been the world’s largest consumer of gold. Demand suffered under a very weak rupee, as the price of gold in the local currency climbed to an all-time high.

The rupee’s recent strength has helped to increase Indian gold demand with flows climbing to a five-month high, according to UBS. What’s helped bring shoppers back to the market is the fact that the exchange rate is back to where the rupee was in April.

This improvement in the currency comes just in time, as the wedding season is in full bloom. Every year, about 10,000 weddings are held in India from late September through January, in between the monsoons and the summer heat. Gold has historically been closely linked with the celebration of weddings, as the bride wears the precious metal and gifts of gold coins are given to the newlyweds.

In addition, Diwali will be celebrated in November. The Festival of Lights is India’s biggest and most important holiday of the year and is celebrated by almost 1 billion Hindus around the world. Traditionally, on the first day of Diwali, it is considered auspicious to clean the home and shop for gold.


Why is India so significant to gold? As you can see below, from 2000 through 2011, the rising incomes in both China and India have been strongly correlated to the price of gold.

http://www.usfunds.com/media/images/...sGoldPrice.gif

Investors now have two strong reasons to invest in gold: the Fear Trade,
driven by an expanding monetary base, and the Love Trade, driven by rising gold demand in Chindia. If you're already sold on gold, make sure to maintain a modest 5 to 10 percent weighting in gold and gold stocks. For those investors who aren't in gold, what's stopping you?

Index Summary

 

1. The major market indices rose this week. The Dow Jones Industrial Average increased 1.29 percent. The S&P 500 Stock Index rose 1.41 percent, while the Nasdaq Composite gained 0.64 percent. The Russell 2000 small capitalization index closed the week with a gain of 0.65 percent.
2. The Hang Seng Composite rose 1.11 percent; Taiwan fell 0.32 percent, while the KOSPI decreased 0.05 percent.
3. The 10-year Treasury bond yield rose 11 basis points for the week, to 1.74 percent.

All American Equity Fund - GBTFX • Holmes Growth Fund - ACBGX • Global MegaTrends Fund - MEGAX
Domestic Equity Market

The S&P 500 Index rose 1.41 percent this week, as the market climbed higher on better economic news and a more optimistic sentiment. Financials led the way on broadly improving sentiment due to the rebound in housing, loan growth and Fed policy. Technology lagged and was the only group to post a loss this week as negative earnings preannouncements weighed in the sector.

1. The financial sector was the best performer this week rising 3.03 percent. Financials have quietly become the best performer in the market over the past month, three months and trailing year. Hartford Financial Services Group was the best performer this week, rising by more than 9 percent as the company announced it is selling its life unit, a broker-dealer and its individual annuities distribution business. This will free up capital that will likely be returned to shareholders.

1. The healthcare sector registered the second best performance this week, rising by 2.59 percent. The managed care companies were among the best performers with Humana, WellPoint and Aetna all rising by more than 5 percent. Some of these gains were attributed to Mitt Romney’s performance in the presidential debate.

http://www.financialsense.com/contri...in-perspective

Initial Reaction and Election Impact

The establishment report of +114,000 jobs was pretty much about what most expected. The four-month average is a mere 120,000 a month (a very weak set of establishment numbers for this point in a recovery).
However, the household survey surprise shows the unemployment rate fell three-tenths of a percent to 7.8%.

On the surface, this is a solid showing, and 100% certain to boost the Obama campaign. I suggest these numbers will overshadow a horrendously weak performance by the president in the debate.

That said, a closer look scan be attributed to a surprise rise of 582,000 in part-time workers. U-6 unemployment remained at 14.7%. U-6 includes part-time workers who want a full-time job.

Still, all things considered, this was the strongest report in four months.
Does it change my recession outlook?

No, it doesn't. A one-month potential outlier based primarily on a rise in part-time employment, accompanied by other weak data does not change my perception.

Jobs Report at a Glance



Here is an overview of today's release.

1. September Payrolls +114,000 - Establishment Survey
2. Four-month average +120,000 - Establishment Survey
3. US Employment +873,000 - Household Survey
4. Involuntary Part-Time Work +582,000 - Household Survey
5. Baseline Unemployment Rate -.03 at 7.8% - Household Survey
6. U-6 unemployment did not drop. It remained at 14.7%.
7. The Civilian Labor Force +418,000

Recall that the unemployment rate varies in accordance with the Household Survey not the reported headline jobs number, and not in accordance with the weekly claims data.

Quick Notes About the Unemployment Rate

 

1. US unemployment rate -.3 to 7.8%
2. In the last two months the unemployment rate dropped .5%
3. Reversing a three-month trend, those "not" in the labor force fell by 211,000
4. In the last year, those "not" in the labor force rose by 2,643,000
5. Over the course of the last year, the number of people employed rose by 2,867,000.
6. Participation Rate rose .01 to 63.6%
7. Long-Term unemployment (27 weeks and over) was 4,844 million a decline of 189,000
8. Were it not for people dropping out of the labor force, the unemployment rate would be well over 10%.

Over the past several years people have dropped out of the labor force at an astounding, almost unbelievable rate, holding the unemployment rate artificially low. Some of this was due to major revisions last month on account of the 2010 census finally factored in. However, most of it is simply economic weakness.

September 2012 Jobs Report
Please consider the Bureau of Labor Statistics (BLS) September 2012 Employment Report.

The unemployment rate decreased to 7.8 percent in September, and total nonfarm payroll by 114,000, the U.S. Bureau of Labor Statistics reported today. Employment increased in health care and in transportation and warehousing but changed little in most other major industries.

Unemployment Rate - Seasonally Adjusted




http://2.bp.blogspot.com/-x_fhb3ANt0...l-2012-09A.png

CurrencyMan: Good Night...

http://globaleconomicanalysis.blogsp...Trend+Analysis)



Greek Prime Minister Warns of Societal Collapse Like Weimar Germany; Citizens Storm Defense Ministry; Merkel Takes Gamble on Visiting Greece




Greece is politically and economically bankrupt. Unemployment is 24.4% and destined to get much worse with the latest round of austerity measures.

Worse yet, Greece is still encumbered by massive layers of bureaucracy that makes it difficult to get anything done.

Yesterday, in a massive breach of security, Greek citizens stormed the defense ministry. This has German chancellor Angela Merkel willing to take a chance on a trip to Greece next week.

Today, Antonis Samaras, the Greek Prime Minister warns of societal disintegration without urgent financial aid.

Antonis Samaras says Greece's democracy is in danger, comparing situation to Germany's pre-war Weimar Republic

Greece is teetering on the edge of collapse with its society at risk of disintegrating unless the country's near-empty public coffers are shored up with urgent financial aid, the country's prime minister has warned.

Almost three years after the eruption of Europe's debt drama in Athens, the economic crisis engulfing the nation has become so severe that democracy itself is now imperiled, Antonis Samaras said.

Resorting to highly unusual language for a man who weighs his words carefully, the 61-year-old politician evoked the rise of the neo-Nazi Golden Dawn party to highlight the threat that Greece faces, explaining that society "is threatened by growing unemployment, as happened to Germany at the end of the Weimar Republic".

Mounting anti-austerity rage before a new round of sweeping EU-IMF-mandated austerity measures appears to have caught the government off-guard, with officials voicing fears over the ability of Samaras's fragile coalition to survive.

The unprecedented storming of Greece's defence ministry by hundreds of protesting dockworkers on Thursday – a breach of security not seen in modern times – has especially unnerved officials. On Friday, Samaras lashed out at "those who don't understand the meaning of law and order".

"The government is waging a battle on all fronts for the nation's credibility and its future so that the sacrifices made by Greeks aren't lost," he said, referring to the spending cuts and tax increases that have sparked record levels of poverty and unemployment. "I will not allow the country to become a free-for-all."

Read more at http://globaleconomicanalysis.blogsp...2fyGYm3cedU.99

http://www.forexfactory.com/showthre...7077&page=3866

http://w.sharethis.com/images/check-big.png http://w.sharethis.com/images/check-big.png http://w.sharethis.com/images/check-big.png
http://thetruthwins.com/wp-content/u...ld-450x336.jpg
Most Americans have no idea what a tremendous advantage the United States possesses by having the primary reserve currency of the world, and most Americans also have no idea how close the U.S. dollar is to losing that status. For the past 40 years, the vast majority of all global trade (including the buying and selling of oil) has been done in U.S. dollars.

That is still the case today, but things are starting to shift. All over the globe international agreements are being made to move away from the U.S. dollar and to use other currencies in global trade. The second largest economy in the world, China, has been particularly aggressive in seeking to change the existing financial order. As you will see below, China has been running all over the planet making agreements with other nations to start conducting an increasing amount of trade in currencies other than the U.S. dollar. And of course the Chinese are heavily promoting their own currency - the renminbi. So why is this happening? Well, for one thing, the truth is that the United States is not the only superpower in the world anymore. The Chinese economy is actually projected to become larger than the U.S. economy by 2016, and by some measurements the Chinese economy is already larger. So Chinese leaders have been very open about the fact that they believe that it just doesn't make sense that the vast majority of all global trade should continue to be conducted in U.S. dollars, especially considering the reckless money printing that the Federal Reserve has been doing. At a time when the status of the U.S. dollar is already slipping, QE3 is deeply undermining confidence in U.S. currency.

And when the U.S. dollar does lose reserve currency status, the consequences for the United States are going to be absolutely catastrophic.

Sadly, most Americans don't even know what a "reserve currency" is or that the U.S. dollar is under attack.

The Chinese have not only been talking about cutting the legs out from under the U.S. dollar - they have been actively doing it. The following is an excerpt from a recent story by Alan Wheatley, a global economics correspondent for Reuters....

Fed up with what it sees as Washington's malign neglect of the dollar, China is busily promoting the cross-border use of its own currency, the yuan, also known as the renminbi, in trade and investment.

The aim is both narrowly commercial - to reduce transaction costs for Chinese exporters and importers - and sweepingly strategic.

Displacing the dollar, Beijing says, will reduce volatility in oil and commodity prices and belatedly erode the ‘exorbitant privilege' the United States enjoys as the issuer of the reserve currency at the heart of a post-war international financial architecture it now sees as hopelessly outmoded.

The mainstream media in the United States is almost entirely ignoring these developments, but the truth is that all of this is a very, very big deal.

The following are just some of the international currency agreements that China has made in the last couple of years....
-China and Germany (See Here)
-China and Russia (See Here)
-China and Brazil (See Here)
-China and Australia (See Here)
-China and Japan (See Here)
-China and Chile (See Here)
-China and the United Arab Emirates (See Here)
-China, Brazil, Russia, India and South Africa (See Here)

Most U.S. economists dismiss this threat by pointing out that China has stockpiled so many U.S. dollars and so much U.S. debt that if anything happens to the U.S. financial system China would be significantly damaged as well.

That may be true to a certain extent, but what is also true is that most Americans fundamentally misunderstand our relationship with China.

Most Americans believe that we are "friends" with China just because they are conducting massive amounts of trade with us.

Sadly, that is not how the Chinese see us. They see us as "the competition", and they very much plan on coming out on top in the end.

Right now, the Chinese are stockpiling mind blowing amounts of gold. They are preparing for the day when the U.S. dollar crashes and when hard assets will be the place to be.

And some are even speculating that the Chinese may be planning to back their own currency with gold at some point.

The following is an excerpt from a recent article by Christopher K. Potter, the president of Northern Border Capital Management....

For three thousand years China has been at the forefront of monetary innovation. It was the first to legalize gold money in the tenth century BC and two millennia later it issued the world’s first paper currency. Fast forward to 2012 and China is at it again, eclipsing Australia as the largest producer of gold and increasing its monetary gold reserves at an alarming rate.

Five years ago China surpassed the US in gold production and five years from now it will own more gold than the US Federal government.

Do not dismiss this as just another example of China’s insatiable appetite for natural resources. It is not. China is preparing for a world beyond the inconvertible paper dollar, a world in which the renminbi, buttressed by gold, becomes the dominant reserve currency.

Lest anyone doubt China’s resolve, just consider the following:

The Chinese government has recently removed all restrictions on personal ownership of gold; legalized domestic gold exchange traded funds; is currently purchasing 100% of domestic gold mine production; has imported over 750 tons of gold (27% of global output) in the last 12 months; stated publically its intention to add 1,000 tons per year to its central bank gold reserves; and is buying major stakes in foreign gold mining companies. The scale of this initiative is extraordinary.

Hmm let's see, if a super power nation is losing edge in global economy competitiveness what will be the final show down? Military super power force and put aside free trade, democracy and human rights to regain its status rather than being outsmarted?

Then what will be the diffrence from what Hitler did trying to annihilate an entire race?

EUR bull remains active. support at 1.3000 n 1.2970. upside target above 1.3150 in the medium term.

Can you please post a rationale (technical, fundamental or both) behind your call for 1.3150 in the medium term?

I appreciate your submission here, but without the analysis that helped you arrive at that conclusion, it offers no value to the readers of this thread.

Thanks

H4



Daily



Source: FPA

CurrencyMan, I don't know if this is your take or if you copied it from somewhere. Anyway I'd like to offer a few comments - no disrespect intended.

Your text in Bold/Italic;

…Most Americans have no idea what a tremendous advantage the United States possesses by having the primary reserve currency of the world…

There are need to know and a nice to know situations. Those who need to know – know – and that’s all we need to know for now.

…and most Americans also have no idea how close the U.S. dollar is to losing that status…

Is that a fact or just subjective speculation? Not about most Americans but “how close” – really?

… but things are starting to shift…

Yes, perhaps but that does not necessarily mean it will. And if it might not be without a serious fight if any want to try.

…The second largest economy in the world, China, has been particularly aggressive in seeking to change the existing financial order…

Yes, and they have still not succeeded – have they?

…the Chinese are heavily promoting their own currency…

Yes, and so are the Europeans and Putin have ambitions too.

…The Chinese economy is actually projected to become larger than the U.S. economy by 2016…

Yes, and projections are only projections. In this instance it will require that China can continue to export their production at an increasing rate. But is that what we see?

…So Chinese leaders have been very open about the fact that they believe that it just doesn't make sense that the vast majority of all global trade should continue to be conducted in U.S. dollars, especially considering the reckless money printing that the Federal Reserve has been doing…

Now we begin to close in to something strategic. The Chinese would love to see their own currency become the reserve currency and have their dollar denominated holdings converted to renmimbi so they can hold the US in a tight grip while the US after that can devalue as they please. Wishful thinking. Secondly is it really “reckless money printing” we see from the Federal Reserve. I politely disagree because devaluation makes sense in the greater picture when a Country continue to import more than they export while at the same time entire industries are being exported with mass unemployment as a result.
Greece is a great example. They are kept under a currency with a value that is simply too high for the way their society function. The same goes for the US. It is due time to change that and when the Chinese will not change the peg to the US dollar then instead they will feel the heat by the fact that inflation will be exported to China instead. At the same time their export will be reduced (already a fact with factories closing throughout China) and no real chance to have the Chinese people to lift their own consumption because their own middleclass is simply not big enough to make any impact.
The Chinese will be hit on two fronts. Inflation and reduced export.

…And when the U.S. dollar does lose reserve currency status, the consequences for the United States are going to be absolutely catastrophic...

Who say so? When is when and now is now. Again are rather subjective opinion that would carry more weight if “And when” was changed with “If”.

…Sadly, most Americans don't even know what a "reserve currency" is or that the U.S. dollar is under attack…

Again “Need to know vs. Nice to know”. Those who need – knows.

…The aim is both narrowly commercial - to reduce transaction costs for Chinese exporters and importers - and sweepingly strategic…


Maybe but the US is working along these lines as well. Remember the Obama administration approved the financial war games to be conducted in 2009 at the “Applied Physics Laboratory”. If I remember correctly they were behind the Manhattan Project as well. Today they are involved in numerous Homeland Protection projects. These war games were about stocks, bonds, derivatives and currencies. Very simply it’s about taking potential war to the financial system. So does any here think that the US will just sit and watch?

Take a look at Iran. Does any think their Rial just for no reason fall of the cliff? Perhaps Iran right now is a good example of the power to be unleashed in future currency wars. So much cheaper. Not a single shot fired and so effective. And if need be then the US is still the largest military power in the world.

…Right now, the Chinese are stockpiling mind blowing amounts of gold. They are preparing for the day when the U.S. dollar crashes and when hard assets will be the place to be…


Don't forget the fact about "Gold printing" as compared to "Dollar printing". In 2011 the world mined 2700 metric tons of gold. That was added to the gold balance sheet. And this continue every year.

We should not oversee the latest "Gold producing bacteria" that can produce pure 24 karat gold. If not on a grand scale right now at least you never know where this will take us in a few years time in the tech advanced age we live in. Perhaps this will add real devaluation of Gold.

http://www.huffingtonpost.co.uk/2012...n_1938457.html

For ordinary people then I question the value of Gold. In today's society we use electronic currencies and most don't even carry cash anymore. It's all about credit/debit cards. I agree if all this falls apart then perhaps Gold is good but I rather have ample stockpiles of ammunition if it comes to that.

Anyway Gold is good but raw overwhelming military power is better.

And if push comes to shovel the world might just see and accept the dollar for what it is – a currency that needs a somehow lower valuation to bring import / export in balance again.

Have a nice day (no pips on Saturdays).

Changed your views so quickly . remember i mentioned 1.307.. on the charts that day and you said its toasted ?

Defying gravity is very clear. Where it is going totally I have no idea. Obviously the BB want to hit the top again. Profit taking at it's best on Friday and hey they can push it up come next week again for profit.

You can tell they are just pushing the buy button and dumping funds into the EUR then they are holding the line until they want to push it again for whatever reason.

Did I said anything?

no... it is pretty simple if you tihnk about it. Major resistance. 45-50 and it ran right through that. As you said huge resistance at 70-75. So even if it went through it is going to come back especially on a Friday and at 15-20 more I would have added again around 90. Basically it is what I consider a exhausted leg resistance trade. 1 busted resistance with very slow movement up but two? No way on a Friday with such good data from the US which might have kept it down.

Was wondering the same thing... You have been biased long all week.

Not able to understand, could you please explain your point?

Hello tinypip

On the weekend I will give your views the attention it deserves. I just wanted to acknowledge your post and add a link to one of the topics that we are discussing. I want to make it clear that usually when I post information here by linking it, the odds are good that I agree with that educated opinion. Some times opinions are so strongly backed up by facts that have an historic background that little doubt remains other than the timing. My strength is in my researching the subject and understanding it and then verifying it by watching other events unfold always ready to change my view if there are new elements to digest and consider.

The words in Italics are the author of that article. I will add my own thoughts on where I agree or disagree and why.

http://www.bullioninternational.com/...robert_triffin

Snippet:

Oct 02, 2012
Have you seen Robert Triffin?

By Joe Yasinski and Dan Flynn

Have you seen Robert Triffin?

"It was the outcome of an unbelievable collective mistake, which, when people become aware of it, will be viewed by history as an object of astonishment and scandal"

-Jaques Reuff 1972

The obscure Belgian economist Robert Triffin is not only very dead he also isn't exactly a household name, yet. Triffin, who died in 1993 studied at Harvard, taught at Yale, worked at the Federal Reserve, the IMF, and was a key contributor to the formation of the European monetary system.

Triffin exposed serious flaws in the Bretton Woods monetary system and perfectly predicted it's inevitable demise yet his work remains largely ignored and unstudied by today's mainstream economists. This "flaw" became known as the Triffin dilemma, and many believe Triffin's dilemma has as serious implications today as it did 50 years ago. In short, Triffin proposed that when one nations currency also becomes the worlds reserve asset, eventually domestic and international monetary objectives diverge. Have you ever wondered how it's possible that the USA has run a trade deficit for 37 consecutive years? Have you ever considered the consequences on the value of your Dollar denominated assets if it eventually becomes an unacceptable form of payment to our trading partners? Thankfully for those of us trying to navigate the current financial morass, Robert Triffin did.

Prior to the 1944 Bretton Woods agreement, central banks used gold as the asset to back their currencies. By the end of World War II, the United States had established itself as the world's creditor and largest holders of gold. Under the 1944 Bretton Woods agreement, the US Dollar was fully backed by gold at a fixed value of 1/35th an ounce per dollar, and foreign Central Banks could use US Dollar assets as reserves backing their currency, in lieu of gold. This agreement avoided the inevitable deflationary pressure a return to pre-war gold/currency ratios would have forced just as Europe was beginning to rebuild, and allowed US debt held abroad to be used as an asset by central banks against their local currencies.

In the 1960's Triffin observed that there existed an excess of dollars offshore relative to the gold available to tender at the set $35 price. He hypothesized that given foreign central bank demand for dollars as reserves, the trend of a growing and continuing glut of dollars was going to continue unabated. It would continue until the excess reserves would so clearly be many multiples of the gold available to satisfy them that enough countries would start tendering dollars for gold and eventually the entire scheme would collapse. Triffin went as far as congress in 1960 to testify that the system as currently devised could not possibly maintain both liquidity and a stable value in the dollar and eventually, the agreement would prove unsustainable. As Triffin predicted, on August 15, 1971 the United States closed the gold window as Richard Nixon came on national television and defaulted on US gold obligations while national gold reserves drained from over 20,000 tons to 8,133 tons. Up until Nixons actions, foreign sovereigns tendered their dollars for gold at an increasing pace. On that day, nations that were holding US dollars because they were "as good as gold" were left with paper promises and nothing more.

At that time, the world was at a crossroads. Would foreign governments and trade partners continue to accept fully fiat US Dollars? The alternative was a deflationary return to a hard (pre-Bretton Woods) gold standard. It can be argued that structural support was granted to the dollar given the fact that with cheap oil, the US economy was expanding at a pace far more rapid than the growth in US government debt. They rationalized that US dollar was still a claim on future growth and production and the rest of the world was lifting it's standard of living as well. Going backwards to the last failed monetary regime was politically unappealing.

And so the US dollar hegemony continues to this day. The dollar is fully entrenched as the settlement currency for international trade. As of today if any nation wants to buy oil, the lifeblood of the global economy, they pay in dollars. This alone, along with demand for foreign reserves create an unnatural demand for US assets, specifically treasury debt. Robert Triffin opined that the collapse of Bretton woods did not solve his dilemma because the country that supplies the world with it's reserve asset in the form of their currency and debt will still be forced to supply an excess of this reserve to satisfy world demand and thus, run a trade deficit in perpetuity. Such a dynamic can not exist under the natural laws of economics, it can only survive only with active and unanimous political support and intervention.

The issue facing the modern United States as aptly noted by blogger FOFOA is that since the rest of the world uses the US dollar as a reserve behind their own currencies, that demand has allowed the United States to run a deficit in perpetuity and the mechanics of this trade has allowed the US to export price inflation abroad. Quite simply, the US imports real goods in excess of the real goods it exports. The deficit balance minus service exports is made up with printed US dollars. Our trade partners ship/recycle the same dollars back to the United States in exchange for US Treasury Debt. The US Treasuries are held as reserves on the balance sheet of their central bank, and local currency printed against those new reserves. This process, although inflationary for our trade partner, allows them to keep their currency weak vs the US Dollar and prices cheap for US consumers.

Every nation on earth other than the United States has a limit to their potential trade deficit confined by their existing reserves plus their borrowing capacity. Not only does the US have the capacity to run a perpetual and growing trade deficit but the rest of the world actually demands us to run a balance of payment deficit or else their reserves will have to shrink, along with their credit, currency and economy. Good deal for us, no? This situation means that for 40 years our trade partners have not only tolerated, but dysfunctionally enabled our perpetual deficits. The United States has had the "exorbitant privilege" of being the issuer of the worlds' reserve currency. We've all enjoyed the benefits, now comes the pain.

Sure enough as Triffin foretold the US trade surplus began shrinking immediately after the collapse of Bretton Woods and transitioned to a permanent trade deficit by 1975, never to return to a surplus to date, 37 years later. The previously stable national debt (with a permanent ceiling of $400 billion dollars) has ballooned to over $16 trillion dollars, a multiple of 40 times what it was during the previous monetary regime. Given this 4-decade perpetual trade deficit with the rest of the world and "hyperinflation" of US dollar credits and claims, many have wondered how the US has avoided massive price inflation at home.

Triffins dilemma continues to play an important role in the ongoing financial crisis the world has found itself in since 2008. The governor of the Peoples Bank of China specifically referenced Triffins Dilemma as the root cause of the current financial disorder and suggested an immediate effort to transition away from the US dollar to avoid more catastrophic consequences.

The US Council on Foreign Relations aptly describes why Triffins dilemma becomes unsustainable:

"To supply the world's risk-free asset, the center country must run a current account deficit and in doing so become ever more indebted to foreigners, until the risk-free asset that it issues ceases to be risk free. Precisely because the world is happy to have a dependable asset to hold as a store of value, it will buy so much of that asset that its issuer will become unsustainably burdened."

Have we reached the day when the United States has become unsustainably burdened? Can US debt honestly be considered to still be risk free? S&P certainly doesn't think so, neither does our second largest creditor, China (after our own Federal Reserve) who has been a net seller of US government debt for some time now. And where will the world go to find another dependable asset to hold as a store of value?

Triffins endgame is simple. A rapid diversification of reserves out of the dollar by foreign central banks. This diversification out of the dollar is only possible given a viable alternative. More and more nations are agreeing to unilateral trade agreements settled in their individual currencies. With each new agreement, global demand for the dollar wanes. It is no coincidence that QE1 coincided with China and the rest of the world backing off demand for US treasury debt. The amounts of QE2 and QE3 match perfectly (or close enough for government work) with US trade deficits from 2009 to today. Given the US Government's seemingly permanent addiction to "free" foreign goods, the trade deficit appears to be irreversible. The extreme danger for those of us in the United States, holding assets denominated in US dollars, is that the Fed is actively creating base money to feed the addiction. As the monetary base grows, the value of existing US dollar denominated assets and credit is devalued.

One way to protect against this debasement of your savings is to do as the central banks do – acquire and hold physical gold bullion.

The blueprint for this alternative has been in plain sight since the late 1990's, and if you watch what central banks do – not what they say – you can benefit.

For the first time in FOUR DECADES, global central banks have become net buyers of gold. This central bank demand has been driven by countries that previously had an insatiable appetite for US treasury debt – most notably China. After 40 years, the political and structural support for US dollar holdings abroad is slipping away. Foreign central banks know that the only way to protect their reserves (and defend the value of their home currency), is by holding gold. Their preparations are well under way.

Just as central banks are increasing their gold purchases, private citizens also are exercising their right to diversify their own private reserves. But given the still infinitesimal rates of gold ownership (1% tops most estimates) there is a long way to go. Why shouldn't the average person do what the big boys are doing? Diversifying out of the dollar, out of paper currencies and making sure their assets aren't someone else's liability seem prudent for everyone in times like there. Here at GBI, we see ourselves as a way for every investor to have the choice on how to save their stored labor. We want to make it as easy to buy and sell gold as it is to move money from your savings account to your checking account. We can all walk in the footsteps of the giants, as a Friend and mentor is apt to say.

As a bonus, if gold was to become the worlds foremost reserve asset, would that not finally solve good old Triffins dilemma? Wouldn't gold serving as the preferred global saving vehicle and fiat continuing to serve as the worlds spending vehicle finally break the natural tension Triffin has so aptly illuminated for us? Perhaps, but given golds stable supply and other unique features (see our next essay titled "Forget Supply and Demand, it's all Stock to Flow."), it would by necessity be at a much higher price to function in that reserve role. Some estimates put that potential price into the many tens of thousands of dollars, and given a monetary and fiscal path that seems to be following Triffins fateful trajectory, how could any price be ruled out?


« Return to Blog

CurrencyMan: I see no reason but to accept the above at face value. It confirms what I already know and understand after being aware of this subject for over 45 years at age 24.

Anyone here with thoughts on this please join in the discussion.

http://www.bullioninternational.com/...esting_is_hard

I did not understand what he meant was my point concerning what you posted. He acted like you changed your opinion or something by your post and that did not make sense to me.

Hi guys, I just drew fib levels on my charts and it would seem that this is the nearest we are getting to the 78.6 at 1.30927. We could perhaps still burst higher to get there. But if AB=CD were to hold true for the gartley pattern, then 1.272 of BC would give us around 1.27306.

Wonder if this will happen.

very neat, thanks for the link, interested in seeing what he has to say