Isaac Newton gave us a fundamental law of physics. Every action has an equal and opposite reaction. In the investment world, currency is the action. Since the US is still the biggest economic player, the US dollar moves everything. Some things have the same action as the dollar. Others are the opposite reaction of the change in the value of the dollar.
Like it or not, commodities like oil and sugar rise in price when the dollar drops in value. Commodities are the reaction of the currency trend action. We can make the same analogy with gold and silver. As the dollar falls, gold and silver rise. The chart this week shows the relationship of the intraday trading for the week with the US dollar represented by the green line (the ETF UUP) and the gold ETF, GLD, represented with the candlestick line. They are opposite action and reaction. The only question is whether or not gold is in a bubble.
The answer is gold is not in a bubble as long as the dollar continues to lose value. Ditto for silver. Now we have to ponder the trend of the dollar going forward. On that question, there seems to be unanimous agreement that the Federal Reserve is determined to drive the dollar down and finish off the job they started in 1913. They have already embarked on quantitative easy that is nothing more than creating dollars from thin air to buy Treasuries from shill banks who then put the dollars into the indices. The Fed continues to talk QE and from their meeting last week, they have even offered the prospect of deflation as an excuse to inject more cash. Coupled with tens of trillions of debt and a Congress spending money like a drunken sailer at a strip bar, there seems to be no end to the amount of currency that has been, and will be, created. This is inflation and not deflation. The Fed just lies about deflation so they will have an excuse to print more dollars. Why do they do this?
Their only mission is to manipulate the indices and thereby assist their shill banks in dominance and control. Very simply, they are here to take everything we've got. Right now they are confiscating our real estate. The health care tax is a confiscation of our medical treatment. They will soon confiscate our retirement accounts. They know that they can use the stock indices as a ruse to dupe the dopes into thinking all is well and that the Fed is here to help. In real terms, the US dollar has lost more than 50% of its value since 2001 while the Dow has remained at the same level of ten years ago - 10800. The truth is the Dow has lost 50% in terms of purchasing power. To say, or think, that the Dow is holding its own is a ruse.
To that point, the Fed has completely taken over the stock indexes and manipulates them every day. To stave off a complete and cataclysmic real estate collapse, the Fed has taken on the task of manipulating the Treasury yields lower by buying them up like a fat man at a doughnut shop. They are using POMOs, REPOs, and QEs while at the same time, they are extending the use of derivatives that are supported by Treasury collateral. They have also advanced their lying campaign to include the ridiculous idea of deflation which also induces investors to buy more Treasuries. I think Treasuries are a good buy but not because there is inflation. They are a good buy because the man with the golden printing press is buying them.
Yes, the Dow can be inflated like commodities. A quick look at the chart shows a microscopic one-week view of the dollar and gold. The question of a trend can therefore be answered. As long as the Fed continues to destroy the dollar, gold and silver both can be considered to be following an inverse trend reaction to the dollar devaluation action and not in bubble territory. This is how deflating dollars can be turned into inflating gold!
9/27/10 - 10/01/10 Intraday 30-minute bars: GLD = candlestick, UUP= green line
Chart courtesy StockCharts.com
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All articles published on this site are the opinion of the writer, Barry M. Ferguson, and are intended solely for discussion and education. Nothing herein should be construed as an offer to sell anything nor as individual investment advice. Every investors' situation is different and as such, should consult directly with a professional advisor before buying or selling any position in any security. Any decisions made from any information from this blog are done entirely at the readers own risk. BMF Investments, Inc. assumes no responsibility for non-clients.