Saturday, October 31, 2009

How and Why China Will Flood the Gold Market

As you read this, the Chinese government is doing an extraordinary thing... something nearly unheard of in the modern world.

It is encouraging citizens to put at least 5% of their savings into precious metals.

The Chinese government is telling people gold and silver are good investments that will safeguard their wealth. After last year's meltdown in the stock market, people believe it. After all, Chinese citizens don't receive government retirement money... and they don't have company pension plans like people in many other countries do.

This is why folks in China are lining up outside of banks, post offices, and the new official mint stores to buy gold and silver (they especially like silver because it's cheaper per ounce).

The Chinese attitude toward gold and silver is a striking contrast to the American attitude right now. I don't recall a TV or radio ad from my congressman or President Obama encouraging me to buy gold or silver. Does your bank sell silver bars? Are gold mints popping up in your neighborhood? Are any of your friends, family, or coworkers scrambling to buy precious metals?

In spite of a few ads on television and satellite radio, buying gold and silver in the U.S. is still largely seen as a fringe-group activity. That's not the case in China. And in the big picture, there are three distinct trends occurring in China today that many in the Occidental world are not paying attention to.

First, look where China stands as a gold-producing nation.

In 2008, China produced 9,070,000 ounces of gold, exceeding all other countries. Further, its production continues to rise, while many of the top-producing countries are in decline.

Second, China had the lowest per-capita gold consumption of any country over the past half-century. This year, it is widely expected that Chinese demand for gold will surpass that of India. In other words, they'll also become the world's No. 1 retail buyer.

Third, the Chinese government has been using its foreign exchange reserves to buy gold – a lot of it – and doing so on the sly. This past April, Chinese officials made a surprise announcement that they had been secretly buying gold since 2003, increasing their gold reserves by 76% to 33,886,000 ounces. The Chinese government now owns 30 times the gold it held in 1990. And China is believed to be a leading candidate to buy some or all of the 12.9 million ounces the International Monetary Fund says it will sell.

But all this production and all this buying isn't enough...

Even though China is the world's seventh-largest holder of gold, gold comprises but a tiny fraction of its reserves, as shown in the table below.

What would happen to the gold price if China increased its gold reserves to just 5%? What about 10%? To overtake the U.S. as king of the gold hill, it would have to buy all the gold held by the governments of France, Italy, and Germany combined. Can China really do any of that?

At $1,000 gold, to push China's gold holdings to 5% of reserves would take $55.3 billion; to 10% would cost $144.4 billion; to be the world's top gold dog would run $227.6 billion.

Chinese reserves are approaching $2.3 trillion, of which almost 70%, or $1.6 trillion, are denominated in U.S. dollars. The cost to become the world's biggest holder of gold would be a pittance compared to the amount of money China has available. In other words, money is not a problem.

Combining the country's massive holdings of dollars and the very real likelihood those dollars are going to lose much of their value, the motivation to buy tangible assets is urgent.

Further, keep this in mind: China's reserves continue to grow. Therefore, the country must continue buying gold (or consuming its own production) just to maintain the small gold-to-reserves ratio it has, let alone increase it.

In addition to the government buying precious metals, Chinese citizens will continue gobbling them up, too. Demographics alone tell us why.

Government statistics show the average urban household in China has about US$1,300 in disposable income. Multiply that by the number of urban households in China and you come up with roughly $36 billion in available capital.

According to precious metals consultancy CPM Group, about 9.5 million ounces of gold will be turned into coins this year (including "rounds" and medallions). At $1,000 gold, that's $9.5 billion, or only about one-third of the capital available in China.

The number is more striking for silver: Total coin production this year is expected to hit 35 million ounces, equaling $615 million or just 1.7% of the available capital in China. Of course, a lot of Chinese people want cars and refrigerators, etc., but it won't take much of a shift of this capital into gold and silver to have a major impact on the global retail precious metals market. It may already be under way.

And long-term projections show the demographic trend won't slow down: The middle class in China is expected to increase by 70% by 2020. So over these next 10 years, more Chinese and more money will be coming into the precious-metals markets, all at a time when inflation is almost certain to be high, adding to gold and silver's appeal. Couple this with China's long-standing cultural affinity for gold and you have the makings for a potentially life-changing gold rush.

If I were a crime detective, I'd say China has the motive, means, and opportunity to push gold and gold stocks much higher.


It's starting to get rough in the market... even flashy IPOs are struggling.

For a picture of this "struggling," take a look at the price action in one of the leaders of language education, Rosetta Stone.

Until this spring, you probably ran across Rosetta Stone only in mall kiosks and magazine ads. But in April, that all changed when the company staged the year's most successful public offering. Shares gained 40% on the first day of trading... and climbed as much as 76% higher within a month.

But as you can see from today's chart, folks just don't have much stomach for newer, riskier companies lately. Rosetta is down 35% from its summer peak... and just logged its lowest closing price since going public. The insiders and investment banks didn't even get enough time to dump all their shares!

Friday, October 30, 2009

New Google application may kill these stocks

Google released a new mobile navigation app today and GPS navigation companies such as Garmin And TomTom saw their shares take a plunge. The announcement shaved $1.2 billion off of Garmin’s market cap alone. Its shares are down more than 16 percent so far today to $31.60. TomTom’s shares are down 21 percent to $8.11.

And this is just for an Android app. But Google could very well make it available to other phones as well, and that is what has investors worried...


A question on investors' minds right now: "If the dollar is going to lose more of its value over the coming years, which is a better refuge? Gold, like half of the experts say? Or stocks, like the other half say?

Answer: As you can see from today's chart, the market likes gold better... but not by much.

Today's chart shows the performance of gold (blue line) compared with the performance of stocks (black line). The percentages on the right-hand side show the gains since May. This is when the U.S. dollar decline kicked into high gear.

Gold is a dollar refuge now for the same reason it has been for thousands of years. It represents real money that can't be printed at a whim to buy votes. Stocks are a dollar refuge because they represent claims on the profits and assets of operating businesses... which tend to grow over time.

Gold is up about 21% since the dollar started plunging. Stocks, which exhibit very similar price action, are up about 17.5% in the same period. This is the market's way of saying, "Both groups are right... but the gold group is right by a little bit more. Own some of both, just to cover your bases."

Thursday, October 29, 2009

This company prints most of the world's banknotes

The U.S. uses the Bureau of Printing & Engraving to print its bank notes. But many countries outsource their banknote printing.

Most of these countries turn to De La Rue Company (LSE: DLAR) to print their banknotes and postage stamps. Many of these are newer contracts (in the last 10 years or so), with larger countries. For example, De La Rue has printed bank notes for the UK since 2003. De La Rue also does passports and other secure identification products.

As you might expect, business is booming at De La Rue. Dividends almost doubled from last year (21.4 pence/share to 41.1 pence/share).


Instead of "Market Notes," we should call this column "Stimulus Notes." After all, copper just surged to a new 2009 high.

Copper is a major component in everything around you... from power lines to plumbing to refrigerators to cars. This "in everything" factor makes it an excellent gauge of global economic activity.

As you can see from today's chart, the economy is active right now. Last week, copper "broke out" of a consolidation period started in August to reach a fresh 2009 high. Amazingly, the metal has nearly recovered to pre-crash levels of $3.25 per pound.

What should we take away from copper's breakout? Well, you should know the huge stimulus programs coming from the U.S. and Chinese governments are "working." These governments have flooded the world with cheap loans and easy money... which is driving demand and speculation in markets like copper and oil. And you should know one more thing...

If the trend of higher copper and higher oil continues, you should know our new "bailouts and credit for everyone" policy is debasing paper currencies... and that old ugly girlfriend from 1970s, inflation, is back in your life in a major way.

Wednesday, October 28, 2009

World's best trading firm says you must be invested in this country

Goldman Sachs believes Brazil is in the long-term sweet spot in terms of economic competitiveness. In addition to a young and rapidly expanding population, Brazil is at the heart of the commodity boom and is likely to see massive injections of government stimulus as they prepare for the 2014 World Cup and the 2016 Summer Olympics in Rio.

In addition to these strong fundamental growth drivers, Goldman also says valuations and risks in Brazil remain relatively low in comparison to other markets...

Shorting U.S. debt is a sure bet

Paolo Pellegrini, the hedge-fund manager who helped John Paulson rack up over $3 billion betting on the U.S. housing crash, said "the only attractive" investment he sees today is shorting long-term U.S. debt. He thinks it's overpriced and due for a significant fall.

“I always like to think about assets that are likely to experience a breakdown; the only thing I’m pretty comfortable with right now is U.S. Treasury securities and U.S. agency mortgage-backed securities,” he said.


Today, we check in again with the Canadian Venture Index to remind readers that, yes, it is still a quiet and steady bull market in small resource companies.

We track small mining and energy companies with the Canadian Venture Index. We consider it the "Dow Industrials of small resource stocks." The Venture has enormous potential to rise in the coming years if folks flee paper money and flock to real assets like oil, gold, silver, and uranium.

We tagged this index as a potential moonshot candidate almost the exact day it bottomed last December... and we've updated you monthly on its progress. This progress has led to a 67% gain so far this year. After such big gains, a trader has to wonder when this bull run will "take a break" and experience a sharp pullback, as all bull markets do.

Our answer: not until it receives a rash of publicity in mainstream newspapers and magazines. Right now, these publications are covering the falling dollar, $8,000 housing credits, and Wall Street pay packages. The bull market in small resource companies just "doesn't sell well" right now. When it does, it will pull the masses in, experience a correction, and – as usual – relieve the public of their capital.

Tuesday, October 27, 2009

China pushes U.S. dollar lower... at new 14-month low

The U.S. dollar is at a fresh 14-month low this morning. Thank China. The FT reports:

The dollar dropped to a fresh 14-month low against the euro on Monday after the People’s Bank of China suggested that, while the dollar should remain dominant, the share of the euro and the yen should increase in its foreign exchange reserves.

The dollar has broken the important $1.50 level against the euro. Cancel that European vacation.

This large bank is in serious trouble

Citigroup is in serious trouble. It's easy to tell by what they are doing.

Inquiring minds note that Citi Abruptly Shutting Down Gas-Linked Credit Cards.

Citi (C) is abruptly shutting down credit cards linked to gas station partners.

The bank is offering few details...

In a followup article the Business Insider notes:

Citi Jacks Credit Card Rates To 29.99% On Unsuspecting Customers..

America has lost its soul and collapse is inevitable

Jack Bogle published The Battle for the Soul of Capitalism four years ago. The battle's over. The sequel should be titled: Capitalism Died a Lost Soul. Worse, we've lost "America's Soul." And, worldwide, the consequences will be catastrophic.

That's why a man like Hong Kong contrarian economist Marc Faber warns in his Doom, Boom & Gloom Report: "The future will be a total disaster, with a collapse of our capitalistic system as we know it today."

No, not just another meltdown, another bear-market recession like the one recently triggered by Wall Street's too-greedy-to-fail banks. Faber is warning that the entire system of capitalism will collapse. Get it?

Saturday, October 24, 2009


This week's chart shows what a high-cost oil producer can do in the midst of a bull market in oil. It's the action in blue-chip oil sands producer Suncor Energy from 2000 to 2008.

During this period, crude oil ran from $25 to $95 a barrel... a gain of 280%. In an incredible display of leverage, Suncor returned 1,030% in the same time.

If Jim Rogers is right about the commodity bull market running for many more years – and oil possibly going as high as $200 per barrel – expect to see more charts like this coming out of the Canadian oil sands.

Harvard Professor: Sun is setting on U.S. empire

The United States’ growing debt burden means the American empire is on the decline while China is on the rise, says Harvard history professor Niall Ferguson.

“People have predicted American decline in the past... and been wrong,” he told Yahoo! News.

“But let’s face it. If you’re trying to borrow $9 trillion to bail out your financial system and economy and already half your public debt is held by foreigners, it’s not really the conduct of a rising empire, is it?”

BULLISH ON SILVER: India wants more of it

Record high gold prices above $1,000 an ounce may encourage more Indian buyers to turn to much cheaper silver, a senior trade official from the world's top bullion consuming country said on Thursday.

"Even today the rural Indian invests more into silver than gold. Higher prices of gold imply even the lower middle class population shifting to silver more compared to gold," said Anjani Sinha, president of the Indian Bullion Market Association, which represents about 10,000 jewelers.


Pipeline stocks are still acting "like they should."

Last March, Tom Dyson introduced the idea of toll bridge income investing. The idea is that a great income investment has the attributes of a toll bridge: It's unique, it's hard to replicate, it collects regular fees, and it requires little ongoing investment.

Companies that store and transport crude oil, natural gas, and petrochemicals are some of our favorite "toll bridge" investments. There's nothing exciting about these companies (called "MLPs")... They simply operate pipes in the ground, provide a vital service, and distribute cash to shareholders.

Last year's credit crisis was rough on MLPs. The benchmark Alerian Index fell over 40%. Investors have flocked back to this sector, however, and pushed the Alerian Index up 36% since Tom's essay.

Back in March, MLPs yielded between 10% and 15%. Now, the average yield is just under 8%. MLPs aren't a screaming deal like they were in March... but should be bought for the long term on a market correction.

The Next Currency to Crash

"What's your slam-dunk currency trade right now?"

I asked my friend Jack that question earlier this week...

Jack's the best guy I know at currency analysis. I've known him for 16 years. Back in the mid-1990s, we worked 20 feet away from each other at a firm specializing in international investing. Jack taught me a lot about currencies and managing my trading (cutting your losses and such).

This week, I drove down to tiny Palm City, Florida, where Jack's Black Swan Trading group is based. We spent a few hours catching up.

Jack explained his favorite trade right now... and he explained an easy way for an individual investor to take advantage of it...

In short, Jack thinks the Japanese yen today is like a ticking time bomb. It's ready to explode... We just don't know when. As of this month, the time may be right.

You see, right now, the Japanese yen is extremely overpriced. It's just off a huge high versus the dollar. The only time it's been higher against the dollar was in early 1995.

Since that's the only similar high in the yen's history, let's take a closer look at what happened next...

In 1995, the Japanese yen was comically overvalued. Everyone knew it. But just like the last six months, the yen kept going higher. Then the bottom fell out.

Soon after the yen peaked in 1995, it crashed... The yen lost 20% of its value in three months and a total of over 40% of its value in three years. That's an astonishing fall in the value of a developed country's currency.

Back then, if you'd bet against the yen with just a little leverage, you could have made a whole lot of money – easily triple-digit gains... even more depending on how you traded it.

Jack told me we're seeing a similar setup today in the yen... and the potential is there for similar gains.

You see, the Japanese can't raise interest rates, since the economy is in the tank. And the Japanese government is issuing more debt to make up for its shortfall in tax revenues. So in essence, it's creating more money out of thin air.

Look, when a currency pays no interest, and its government is writing I.O.U.s, then the value of a currency should fall. Nobody wants something that pays no interest and is increasing in supply.

But for the last six months, the Japanese yen has done the opposite of what it "should" have done. It's gone up... until this month. Jack believes after its huge rise from April, the yen may finally be changing its trend.

In the past, it was tough for individual investors to bet against the yen, particularly in retirement accounts. You couldn't trade futures or options, and you couldn't go short. But now, there's a way to bet against the yen AND get a bit of leverage AND do it all in your retirement account. It's through the ProShares UltraShort Japanese Yen Fund (YCS).

Here's a chart of YCS over the last six months. You can see as the yen has strengthened, these shares have crashed... down from $25 to $20 in the last six months.

But the fund is already up from $20 to $21 this month as the yen has weakened. (It's a "double inverse" fund, meaning for every 1% move down in the yen, this fund should move up 2%.)

A move back to April's level of $25 would be a 25% gain from YCS' lows around $20 – and even then, the Japanese yen would still be near its all-time highs versus the dollar. My point is, even after that gain, there's still much more room to run.

If you know my writing, you know I look for three things in a trade: 1) cheap, 2) ignored or hated, and 3) an uptrend. In the yen's case, we have all three.

Time to follow my friend Jack's advice (the best currency analyst I know), and bet against the yen. The double-inverse Japanese yen fund (YCS) is the smartest way to play it. Thanks, Jack!

Good investing.

Friday, October 23, 2009

Crumbling U.S. dollar shoots crude oil higher

Oil prices hit new highs for the year Wednesday just as the dollar fell to new lows against the euro, showing how much the weak U.S. currency has come to dominate energy markets.

Benchmark crude for December delivery rose $2.25 to settle at $81.37 a barrel on the New York Mercantile Exchange. Prices hit $82 at one point.


After watching gold, copper, silver, and oil run higher this year, the commodity contrarian has to ask, "Is there anything I can buy that hasn't jumped in price?"

Answer: Sure... you can take Jim Rogers' advice and buy grain.

Rogers is one of the world's best investors... and a big bull on agricultural commodities like corn, soybeans, and sugar. Rogers points to low inventories and growing emerging-market demand as factors that will drive prices higher. He says if you want to get rich over the next 20 years, don't go to Wall Street, learn how to farm.

Like all commodities, those in the ag complex were hammered in 2008. The DBA fund – a "one click" way to own corn, soybeans, wheat, and sugar – fell from $42 per share to $22. But as you can see from today's chart, the DBA has bottomed out and strung together the classic bull market action of "higher highs and higher lows."

While gold gets all the press as an inflation hedge, many elite investors consider agricultural commodities (and the land that produces them) a better alternative. Contrarians... here's your commodity... and here's a bull market just getting started.

Dollar plunge gets worse... now at 14-month low

The tremendous decline in the value of the U.S. dollar continues. The FT reports:

The dollar fell through $1.50 against the euro for the first time in 14 months on Wednesday as optimism over the prospects for global growth continued to weigh on the US currency.

The dollar dropped to a low of $1.5017 against the euro in afternoon trading in London, its weakest level since August 11 2008.

Remember folks… this is what your leaders want… it makes paying off our debts much easier… for a while.

Thursday, October 22, 2009

These two countries could send gold $200 higher in a hurry

When most people talk about higher gold prices, they typically mention deficits and inflation. But there's a major factor out East that could send gold $200 higher in a hurry: Central bank buying from China and Japan.

Inside this short FT article, Credit Suisse strategist Andrew Garthwaite mentions the super bullish factor of low real interest rates. But Credit Suisse also has this tidbit: China and Japan control 42% of the world's currency reserves… but just 2% of those reserves are in gold. Garthwaite says,

"If the Bank of Japan and Bank of China wanted to hold 10 per cent of their reserves in gold (compared with 70 per cent in Europe and 80 per cent in the US), they would have to buy around $250bn worth of gold, more than double the world's annual gold production."

Famed market strategist: This is a new bull market

Jeff Saut has played the downturn and the upturn about as well as anyone. The Chief Strategist at Raymond James has been bullish since April and is unwavering in his bullishness despite the huge move in stocks. He sees the continued skepticism in the market as a primary driver of equity prices:

The negative nabobs continue to call this a bear market "sucker's rally!" While it's true that markets can do anything, the real "suckers" have been the bears who didn't employ adaptive asset allocation and consequently have "sat" out the seven-month rally. Clearly, we disagree with the bears' assessment, having maintained the view that this is a new bull market since April.


This week, looking at the list of stocks hitting new yearly highs is looking at a new mining stock boom.

As we frequently mention, the Canadian Venture Index is quietly working its way higher. This is proof tiny mining companies are in an uptrend. Now consider this week's entrants to the new highs list. It's a "who's who" of digging stuff out of the ground.

Some notable names here: BHP Billiton – world's largest mining company. Peabody Energy – world's largest public coal company. Freeport-McMoRan – world's largest public copper company. Vale – world's largest iron ore company. And don't forget the big name in "nuke," Cameco (CCJ).

CCJ is the world's largest pure uranium stock. This is the stuff that powers nuclear reactors and mushroom clouds. Early this decade, uranium soared in price. This drove a big bull market in CCJ and its sector. Then, like all miners, CCJ was clobbered in 2008.

Many uranium watchers expect the commodity to go higher in the coming years. Judging by the new high in the "bell cow of uranium," that rise is getting started.

Tuesday, October 20, 2009

China's gov't-backed milk company is growing like crazy...

China is becoming a land of big milk drinkers; this year, China will consume 25 million tons of milk, putting it ahead of both France and Germany -- that’s a 76% increase from 2000," observes Tony Sagami.

In The Asia Stock Alert, he says, "The best way to profit from this Chinese milk boom, in my opinion, is with China-based American Dairy (NYSE: ADY)."

"The Chinese currently consumes 24 pounds of dairy products per person each year versus a world average of almost 220 pounds.


Today, we look at one of the safest ways to play the new strength in crude oil. We take a stock tip from the world's best investor, Warren Buffett.

Several years ago, Buffett made waves with his purchase of ConocoPhillips (COP), one of the world's largest diversified energy companies. Buffett rarely buys shares in commodity-producing businesses... They simply don't have the stability and pricing power Coca-Cola or Procter & Gamble have. He just thought COP was safe and cheap.

Like all energy stocks, COP suffered a huge fall in late 2008. This was when investors were selling everything and the kitchen sink in order to raise cash. COP struck a bottom around $35 per share in March and drifted around $45 this summer. Just this month, it broke out to $50.

Despite the recent gains, COP is still cheap. Shares go for around five times cash flow and offer a 3.8% dividend yield... which is why Buffett owns more than 64 million shares of the company. If you're looking to safely get long oil, this is one of the best "guru approved" vehicles around.

Crude oil heads for $80

Oil reached $79.05 in electronic trading on the New York Mercantile Exchange [this morning]. That is almost certainly not the end of its rise and for a number of reasons $90 crude is likely on the way before year’s end.

Oil has, so far, traded higher primarily because of weakness in the dollar and the perception that demand will rise as the global economy recovers. It is likely that signs of the recovery will increase, at least temporarily.

Top Japanese bank says dollar to lose reserve status soon

The dollar will weaken to 50 yen from its current level around 90 yen and, eventually, cease to be the world's reserve currency, says Daisuke Uno, chief strategist at Sumitomo Mitsui Banking Corp.

Plus, he predicts, the U.S. economy will experience a double-dip recovery, which will keep the currency weak.

"The U.S. economy will deteriorate into 2011 as the effects of excess consumption and the financial bubble linger," Uno told Bloomberg.

"The dollar's fall won't stop until there's a change to the global currency system."

Why Cash Just Became My Favorite Investment

"We've never seen this aggressive paying down of debt before," said a banker in the Financial Times last week. "Once you slap households in the face... it sticks."

Each month, the Federal Reserve calculates and reports the total amount of consumer credit outstanding in America. This is the money Americans have borrowed to pay for cars, vacations, education, and refrigerator-freezers at Wal-Mart.

When this number rises, it means credit is easy and Americans are in consumption mode. They're buying SUVs, houses, flat-screen TVs, granite countertops, and stainless-steel appliances. And they're borrowing money to make these purchases – often using credit cards – so they're not worried about finances.

When this number falls, Americans are in thrift mode. They prefer saving money and paying off debt to shopping at the mall and going on vacation.

Despite the improvement in the economy and the bounce in the stock market, the American desire to save money seems to be getting stronger...

In the last year, American consumers have reduced their outstanding debt by more than $100 billion, according to the Federal Reserve's data.

In July, Americans reduced their consumer debt by $21 billion... the sixth monthly decline in a row and the largest monthly drop in borrowing ever recorded.

The report for August came out earlier this month. It showed American consumers paid back another $12 billion of their outstanding credit, the seventh monthly decline in a row. At this rate, Americans will have paid off 13% of their outstanding credit-card balances by this time next year.

Not only are Americans paying off debt, but they're saving more money...

Each month, the St. Louis Fed publishes America's savings rate. This is the percentage of disposable income Americans choose not to spend.

In 2005, the personal savings rate fell to less than 1%. This year, it has averaged 4.1%. The last time it averaged more than 4% for the year was in 1998.

Here's the thing: While demand for cash in America soars, investors have been dumping it from their portfolios as if it were venom...

This year, cash has fallen...

60% in terms of Russian stocks
55% in terms of lead
53% in terms of coal
50% in terms of copper
40% in terms of Internet stocks
33% in terms of sugar
17% in terms of gold
16% in terms of the S&P
13% in terms of cotton

Good investing,

Sunday, October 18, 2009


This week's chart is our recommendation to mainstream media to "get real."

On Wednesday, the Dow Industrials climbed over 10,000 for the first time in a year. The rise caused all the major media outlooks to wet their pants and splash it across their papers and websites.

DailyWealth readers know it's a ridiculous exercise. They know the smart investor doesn't pay much attention to the nominal price of stocks. The smart investor measures such things in "real money" terms: in terms of gold. As you can see from this week's chart, in terms of gold, the Dow hasn't done squat this year. The U.S. dollar's plunge has wiped out the real purchasing power of stock gains.

Sure, there are lots of dollars flowing into stocks right now... but the yahoos running the controls in Washington D.C. are making those dollars worth less and less every day.

Dow 10,000? Who cares?

The Only Sure Thing We Know About Gold and the U.S. Dollar

In August, the U.S. dollar celebrated its 38th anniversary as a fiat currency.

When Roosevelt issued his infamous 1933 presidential diktat, forcing delivery (confiscation) of gold owned by private citizens to the government in exchange for compensation, gold was $20.67 per ounce. In January 1934, the price was raised to $35 per ounce. The U.S. government pocketed the difference – and essentially devalued the dollar by 69%.

Yet the dollar remained convertible, and foreign central banks could redeem their dollar reserves for gold. This presented no problem when the U.S. was running trade surpluses and foreigners didn't have many dollars to exchange for gold. But in 1965, France's President Charles de Gaulle started aggressively exchanging his country's dollars for gold and loudly encouraged other countries to do likewise. That year, U.S. gold holdings fell to a 26-year low.

Several schemes were tried to stop the drain on the U.S.'s hoard, including lifting the price to $42 per ounce early in 1971, but nothing worked. The run on the dollar did not abate.

With the U.S. unable to eliminate its trade deficit, Nixon was faced with the stark reality of another dollar devaluation. He opted instead to close the gold window on August 15, 1971, ending dollar-for-gold convertibility. The dollar was suddenly off the gold standard, and half of U.S. gold holdings had disappeared. The greenback began to "float," meaning it wasn't tied to any standard and could be printed at will.

So how's it done since then?

The following chart tracks what has happened to the purchasing power of the dollar and gold since the gold standard ended in 1971. After adjusting for inflation, you can plainly see the erosion of a dollar bill, now able to purchase only 18 cents of what it did in 1971, vs. an ounce of gold, which has not only stood up but increased in purchasing power.

While gold's price has fluctuated, its purchasing power has endured. This fact will not change and is the reason you should own physical gold. It's what I call the four Ps: your Personal Purchasing Power Protection.

At Casey Research, we believe the dollar must go lower over the coming years. Since the end of August 2008, the past year, the U.S. monetary base (coins, paper money, and central bank reserves) has swelled from about $800 billion to $1.7 trillion. This is the largest expansion in history and a staggering devaluation of the dollar.

And as you already know, we're also taking on unprecedented amounts of debt. Year-to-date government spending is $2.9 trillion, while tax revenue is only $1.6 trillion. But that's nothing compared to the massive unfunded liabilities (meaning, they are not covered by an asset of equal or greater value) of Medicare, Medicaid, Social Security, and prescription drugs. Liabilities from this trio total $105.7 trillion.

Taking on debt is like getting a tattoo: It doesn't go away, and it's pretty painful to get rid of. The only way the U.S. government can get rid of its tattoos is by paying them off with greatly diluted dollars.

There are a lot of uncertainties about how this situation will play out. But the future purchasing power of gold is not one of them.

Friday, October 16, 2009


After four months of chopping sideways, crude oil is enjoying what traders call a "breakout."

Breakouts are one of the pillars of common-sense chart analysis. A breakout is simply when an asset makes a new high for a given time period. It can be a short period, like two weeks... or longer period, like six months. The "Turtle Trading" method is famous for making billions of dollars with breakouts (read our friend Michael Covel's site for a lot of great info on the subject).

After watching oil suffer a huge decline in 2008, we noted how the fuel built a "floor" around $38 in February. We then noted its bullish breakout in March... a breakout that resulted in huge gains for many oil stocks. And this week, we must note that oil just broke out to a new yearly high above $75.

We can't know how far this breakout will take oil. It could run to $80... $100... or, as Jim Rogers says, $200 per barrel. But we can note that oil "wants" to go higher right now. We can also brush up on oil-service names, Canadian oil sands producers, and energy-focused denizens of the Canadian Venture Index. A $20 move in oil will result in major gains here.

Why the Nobel Prize is ridiculous and corrupt

Those politically correct morons in Oslo really did give the man the peace prize for nothing more than stating intentions that are contradicted by his actions.

… The unconstitutional detention of individuals convicted of no crimes in Guantanamo Bay continues. The war in Afghanistan – a country that never attacked the U.S. – continues, and may even escalate if General McChrystal gets the troops he asked Obama for. The war in Iraq – another country that never attacked the U.S., and we all know now that the WMD scare was a lie – is keeping the reaper busy. Obama is given much credit for scaling back plans for future missile defense spending, but reports have it that the military itself had already requested a reduction in that program, citing higher priorities.

Besides, the nomination deadline was February 1st, just days after Obama took office, so you know his nomination can’t have had anything to do with actual accomplishments.


Major news in the commodity markets this week: Crude oil just hit a fresh 2009 high. It's more fuel for the fire under small resource stocks.

Longtime DailyWealth readers know we keep a close eye on the universe of small companies that explore for and produce resources like crude oil, uranium, copper, gold, and platinum. They're among the most explosive assets in the world. Rising commodity prices cause huge increases in their asset values and earnings power. Plus, investors love this "story" and often pile into this small sector with lots of money.

We track small resource companies with the Canadian Venture Index. We wrote them up as a sector with major rebound potential right at the index's bottom in mid-December. As scripted, the Venture is climbing along with the reflating of gold and energy prices... and just reached a new high this week.

We've stated it once and we will state it again: As precious metals and energy prices remain robust, this sector will crank out triple-digit winners like Detroit, er, Japan cranks out cars. Traders must be "up" on this market!

The White House's secret plan for the dollar

Now I'll let you in on an awful secret. The US, despite all its BS talk, really wants a lower dollar. The fact is that the US is doing absolutely nothing to defend the dollar.

Of course, if the Fed wanted to defend the dollar they could halt their mass printing of dollars, and they could raise interest rates. And Bernanke could win the 800 meter race at the next Olympics at Rio.

But let's be rational - how in God's name is the US going to pay off trillions in debt? By raising taxes? Impossible. They could renege on the debt like Argentina - unthinkable. But there is a way - they'll try to minimize the importance of the debt with a cheaper devalued dollar.

That's the time-honored US way, but loyal Americans don't believe it. If they did, gold would be selling at $4000 an ounce.

Thursday, October 15, 2009

World's central banks are officially dumping the dollar

For months, governments around the world have threatened to diversify their currency reserves away from the dollar.

Central banks increased their foreign currency holdings by $413 billion, or 6 percent, last quarter.

That was the biggest rise in at least six years, according to Bloomberg News.

And for the countries that reveal how they allocate that money, 63 percent of the fresh cash went into yen and euros during the second quarter, soaring from 37 percent 10 years ago, according to Barclays Capital.


Read five different analyst reports and you'll come away with five different opinions on where the economy is. Some popular ones go from "major recovery on the way" to "we're sort of recovering" to "we're screwed."

That's why one of the most popular investment strategies right now – both with professionals and amateurs – is confusion. Is big inflation on the way... or big deflation? Is the American consumer on death row? Is the dollar imploding?

Our advice: Form your opinions on these complex questions... but let the simplicity of the market judge how useful they are. Monitor "real world" market indicators like Intel, copper, and bonds to see if we're "recovering" or "screwed." Monitor the Baltic Dry Index, too...

The "BDI" is a widely followed gauge of the cost of shipping raw materials across the seas. If the economy is healthy, the BDI will trend higher. If the economy stinks, the BDI will trend lower. As you can see from today's chart, the BDI collapsed during last year's credit crisis... but has rallied hard since. As long as this rally holds above the 2,000 level, one has to trade from the "we're sort of recovering" camp. No confusion needed!

Wednesday, October 14, 2009

Jim Rogers: The 21st century will belong to China

I'm moving to China … possibly to live in a bunker. At least that was my inclination after listening to a presentation by Jim Rogers yesterday.

Now don't get me wrong – Mr. Commodities wasn't all doom and gloom. In fact, his talk was both informative and highly entertaining. But Rogers doesn't sugarcoat things – he's very matter-of-fact about his concerns and projections for the future. And most of them don't bode well for the U.S.

According to Rogers, the 19th century was the era of the British Empire and the 20th century was the U.S.' heyday.

But the 21st century is China's (though the rest of Asia is definitely going to get a boost too).

U.S. and China inching closer to all-out trade war

Although it is never really clear until after the fact which adverse development will be the one that breaks the camel's back, one thing is clear: each addition to the overall burden draws us that much closer to the breaking point.

With two of the world's biggest economies now engaging in a subtle but intensifying game of protectionist tit-for-tat, how long will it be, as the headline of a post at BusinessWeek's Eye on Asia blog puts it, before we do, indeed, see an all-out "China-US Trade War?"

There's no such thing as a free lunch: Gold reaches another new high

There's just one problem with Barack Obama's "bailouts and free money for everyone" strategy: Eventually, you run out of other people's money. Eventually, the market tells you that you can't spend your way out of debt and recession.

The market in this case is the major downtrend in the U.S. dollar and the major uptrend in gold. Super-low interest rates and Obama's insane policies are driving savings out of the dollar… and into real assets like gold. Which is why gold reached another new high this morning, with spot prices hitting around $1,065.

The great Richard Heinlein said, "there ain't no such thing as a free lunch," meaning you can't get something for nothing like our politicians are trying do right now. Rising gold prices reflect this fact.

Tuesday, October 13, 2009


It's like 2008 never even happened... at least for Brazil.

This year, the question for almost any country's stock market isn't "if" it is rising, but "how much." Brazil answers with, "So much that we're near an all-time high."

As you can see from today's chart, Brazil's benchmark stock index has rebounded to pre-crash spring 2008 levels... and is close to its all-time peak reached last May. It's an amazing rebound few countries can claim.

It's a rebound driven by a big rally in commodities this year. Brazil is home to Petrobras, one of the most successful major oil firms of the past decade (up 100% this year). It's home to Vale, the world's largest iron ore producer (up 113% this year). And Brazil has a unique agriculture "kicker." It has vast quantities of rich farmland and fresh water... which make it a major producer of coffee, livestock, orange juice, soybeans, and sugar.

Brazil's "it's like 2008 never happened" rebound leads us to tag the country the "Ferrari of emerging markets." If commodity prices remain robust over the coming years, this market will double from current levels and double again.

The single greatest investment of all time

The single best investment - in terms of greatest return on invested dollars - has been the lobbying efforts of the major banks and finance firms.

They spent $114.2 million dollars in contributions toward the 2008 election, according to the the nonpartisan Center for Responsive Politics. The companies that have been awarded taxpayers' money from Congress's bailout bill spent $77 million on lobbying and $37 million on federal campaign contributions, the Center finds.

George Soros to invest $1 billion into gov't boondoggle

Leave it to billionaire George Soros to try to look good supporting alternative energy while planning to make money at the same time. Soros says he will invest $1 billion in clean-energy technology and donate $100 million to an environmental advisory group to aid policymakers.

Bloomberg says George Soros will screen his investments, saying, "They should be profitable but should also actually make a contribution to solving the problem."

The Soros approach may seem less than charitable, but it may be the right one. Government investments in green energy are hard to track and, like all federal programs, subject to abuse.

Monday, October 12, 2009


This week's chart is a check up on our rebound trade from 11 months ago...

Back in December, we introduced the idea of buying beaten-down emerging markets, like Brazil and India. These markets were among the hardest-hit assets during the 2008 crisis... so we bet they offered the biggest rebound potential.

As you can see from this week's chart, our rebound thesis was spot-on. The big emerging-market fund (EEM) is up 91% since our commentary. So what does one do with this rebound trade now?

Easy: Keep in mind stocks have enjoyed a big run higher... they aren't cheap by any measure... and there are plenty of big economic problems to work through. But also keep in mind Jim Rogers' wisdom, "Markets can often rise higher than you think is possible."

The simple fact is, governments are doing everything in their power to support stock prices. Plus, the all-important trend is up. For you longs: Keep a profit-taking stop loss in place and enjoy the trend.

Saturday, October 10, 2009

The best China insight you'll read all week

The sight of nuclear missiles being paraded down the street in a perfectly crisp formation is simultaneously revolting and awe-inspiring. Yet the Chinese government knew exactly what it was doing when it orchestrated its most prominent display of military hardware in the middle kingdom's history.

This week is China's biggest holiday week of the year, celebrating 'National-day,' when Mao's communist revolutionaries took control of the country. The government kicked off festivities earlier this week with a military parade that was so intricate and precise it made their 2008 Olympic opening ceremony appear utterly amateurish.

China has been beefing up its military for years, and this week was show time. Sure there were hundreds of thousands of adoring locals beaming with pride, but Beijing was really sending a message to the rest of the world.


Today, we perform a "real wealth" check on the stock market. It's a little disappointing...

As we mention from time to time, the seasoned investor computes his returns not in terms of dollars or euros, but in terms of "real wealth." And by real wealth, we mean gold.

Figuring gains in gold bypasses the misleading numbers you encounter because of inflation and currency dilution... It bypasses the "Boy, $50 doesn't cover what it used to" phenomenon and allows you to gauge returns by how much house, fuel, food, and vacation they'll buy you.

Performing this honest calculation is a downer this year: You see, the mainstream headlines will tell you that stocks – as measured by the S&P 500 – are up 18% this year. But gold is up 23% in the same time. So in terms of real wealth, stocks have actually decreased this year. Dollars are flooding the market, but they're worth less and less.

Friday, October 9, 2009

The craziest, most ridiculous thing we've ever heard from the Middle East

There are plenty of needy countries at the U.N. climate talks in Bangkok that make the case they need financial assistance to adapt to the impacts of global warming. Then there are the Saudis.

Saudi Arabia has led a quiet campaign during these and other negotiations -- demanding behind closed doors that oil-producing nations get special financial assistance if a new climate pact calls for substantial reductions in the use of fossil fuels.

Dollar worries accelerate: Gold hits another new record

Another day of dollar worries, another record high for gold.

The spot price of gold jumped over $1,050 an ounce this morning… which prompted all the major news agencies to consult investment gurus like Jim Rogers.

Rogers' response to Bloomberg: "People are printing money, gold is going up." Rogers sees $2,000 gold in the coming years.

The latest Asian bubble: fine wine

Move over New York & London. After abolishing all of its duties on wine (hint, hint Washington, DC), Hong Kong has now become the most lucrative global market for auctioneers Christie’s & Sotheby’s. Asian buyers have decided to buy their fine wines right at home, rather than going halfway across the world to do so.

Asian buyers now account for 61% of Christie’s wine sales so far in 2009 (from 7% in 2005). Buyers from China alone doubled from last fall to this spring. However, David Elswood, Christie’s international head of wine, cautions that the Asian wine market was in danger of overheating after “18 months of hyperactivity.”

The Great Reflation lives on.


The big, "must watch" trend right now: the uptrend in gold and silver stocks.

One of our favorite stocks in this sector is Silver Wheaton (SLW). SLW isn't a conventional silver miner... it's a business built around collecting royalty streams from many different mines. Along with tons of other gold and silver stocks, SLW reached a new 2009 high this week.

When we consider SLW and its sector, we keep a quote from Jim Rogers in mind: "Markets often rise higher than you think is possible and fall lower than you can possibly imagine." Rogers rightly points out that history or fundamentals won't always dictate how far a market will run.

Gold and silver stocks are one of the great "higher than you think possible" assets on the market. Why? Because nobody actually knows how Washington D.C.'s nutty "tax and spend our way to prosperity" program will affect the economy and the paper currency behind it.

There is a decent chance this program – which a third-grader could tell you doesn't add up – will end up a mess. If the mess materializes, gold and silver will run much higher... and gold and silver stocks will rise hundreds and thousands of percent. There's zero guarantee this run will happen, but the potential gains here – and the uptrend you see below – can't be ignored.

Thursday, October 8, 2009

Today's entertainment: State Rep heckled for 90 minutes at health care town hall

NY state representative Steve Israel had a tough go of it this week at his Suffolk County town hall on health care reform.

When the crowd tired of hearing Israel shill for Obama's health care proposal, they began taunting him with shouts of "You're a moron," "We don't care what you think," and "Stop printing money."

At one point he begged them to "stop calling me a liar and listen," which only egged them on further.


In case you've been under a rock for the past 24 hours, the buyers just won the "battle for $1,000 gold."

During yesterday's trading, gold reached $1,043 ounce... which surpasses its March 2008 high. So what's really driving this breakout? Once again, we remind you, "There ain't no such thing as a free lunch."

You see, to pay for all sorts of bailouts, wars, stimulus packages, cash for clunkers, and welfare programs, governments have to borrow lots of money. They even create a little out of thin air to help foot the bill. When they do this, they dilute the value of their paper currencies. Gold, a sort of "anti-currency," is where smart investors flock when this government stupidity gets a little too stupid.

Is gold too popular right now? Probably. But governments know that promising "bailouts for everyone" is how to get elected and stay elected. And as old man gold and his new high reminds us, there just ain't no such thing as a free lunch. Long-term, gold is headed higher.

Wednesday, October 7, 2009

China angling for absolutely huge amount of African oil

The Chinese state-owned oil company CNOOC is in talks to buy huge stakes in several of Nigeria's biggest oil deposits. The areas are already partly or wholly controlled and operated by Western oil companies, but many are coming up for licensing renewal - and China is hoping to grab a piece of the action.

In all, the company is trying to buy 6 billion barrels of proven reserves, over 1/6 of Nigeria's total supply of crude oil, for an estimated $30 to $50 billion.

A letter to the company from Nigeria's president said the inital offer was "unacceptable," but that a more "favourable" revised offer would be considered.

The details of the potential deal are a little unclear, but you can bet Western oil companies will be on the losing end.

Dollar plummets on reports of secret talks to end reserve status

Big oil producing nations denied a British newspaper report on Tuesday that Gulf Arab states were in secret talks with Russia, China, Japan and France to replace the U.S. dollar with a basket of currencies in trading oil.

The dollar eased in response to the report, which was written by The Independent's Middle East correspondent Robert Fisk and cited unidentified sources in Gulf Arab states and Chinese banking sources in Hong Kong.

It said the proposal was for trade in crude oil to move over nine years to a basket of currencies including the Japanese yen, the Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, which includes Saudi Arabia and Kuwait.

Gold on the verge of breakout: Now at $1,020

More strength in the gold market…

Helped by weakness in the U.S. dollar, spot gold prices climbed to nearly $1,020 an ounce this morning.

Bank of America Merrill Lynch nudged gold with a publicized prediction for gold to reach $1,500 an ounce in 2011. We note again that big investment fund interest toward gold is at an extreme right now… so don't be surprised to see a short-term shakeout.


For much of the past 12 months, we've encouraged readers to take a position in municipal bonds. And for much of the past 12 months, it's been an incredible idea. Thank the rich...

When a state or local government needs to borrow extra money for projects like highways and water systems, it does so in the form of municipal bonds. To encourage folks to "loan American," the federal government does not tax the interest earned in "munis."

Now that the old saw "nothing is certain but death and taxes" has been amended to "death and higher taxes," wealthy people are racing to these legal tax shelters like ants to a picnic.

For proof, have a look at the muni bond fund (MCA), mentioned by our colleague Dr. David Eifrig back in June. The fund is up 20% since then – which is a huge move higher for a boring basket of bonds. MCA is no outlier. The charts of nearly every single muni bond fund in America look just the same. Want to know where the rich are putting their money?

Tuesday, October 6, 2009

Get The Best Trading Tips!

1. Accept that a part of trading is losing. Every new trader must understand that even experts lose on trades. The number one rule when making money is to make sure your profits are much larger than your losses.

2. Money management and a trading plan. Always enter a trade knowing how much you are willing to risk and how much you want to profit from the trade. This is called a risk/reward ratio. The difference between successful traders and unsuccessful ones is that the former always enters a trade with a plan and the latter doesn’t.

3. A man’s best friend- the Forex Market. Many new traders are often hesitant to open trades due to the risk and uncertainty involved in trading. Those who overcome their fears often go on to yield enormous profits.

4. Personal responsibility. Great traders accept personal responsibility for everything they do. Remember that you're the one who is pulling the trigger. Great traders know that they are responsible for all the trades they make, either good or bad.

5. Becoming greedy. When traders have an open trade that is making them profit they often forget their pre-determined target for the trade, as they are sure that the trade will continue to make them profits. Remember that the markets are dynamic and trends don’t last forever. If the price reaches your target, bank the profits or move your stop-loss to prevent a loss.

6. Trading the News. Despite what most people might think, most of the really big market moves occur around news event. Trading volume increases and the moves are normally significant allowing traders to grab quick and rapid movements. News-traders often make only one trade a day due to the large potential profits involved.

7. Never trade on wishful thinking. If you place a trade and it's not working out for you, get out! Don't compound your mistake by staying in and hoping for a reversal.

8. Psychological Factor. Emotions are the number one cause of losses. Don't let your emotions sway you, stick to your trading plan and remember to set your stop-loss.

9. "The Trend is Your Friend". When trading in the direction of the trend you're results are almost guaranteed to improve.

By following these set of rules, you will see almost immediately see an improvement in your trades.

All that is left now is to start trading!

Sunday, October 4, 2009

Which is the best currency pair to trade, after a bear market?

While there is no right or wrong we would like to explain and show you why we prefer the AUD/USD and the NZD/USD against the rest of the pairs.

1) The charts present smooth trends. For example on the following chart you can easily
see the AUD/USD’s clear trends, compared to other volatile charts.

2) Both the countries are yielding a higher interest compared to other countries -
this attracts investment.

Over the last couple of months the AUD/USD and the NZD/USD have presented phenomenal trends. To date, both the economies are beginning to show signs of stability, something that could lead to an additional rally.


Remember that "big money" volume we were waiting to see enter the market? Well, it finally showed up. But it showed up with a fistful of sell orders.

The stock market needs the "fuel" of buying from large mutual funds, hedge funds, and pension funds to stay healthy. For the past few months, we noted the lack of participation from these buyers.

At the bottom of our chart of the benchmark S&P 500 fund (SPY), you'll notice a series of black and red bars. Black bars represent trading volume on days the market advanced. Red bars represent days the market declined. The taller the bar, the greater the volume.

As you can see, volume gradually dried up during the summer rally. But in the past week's selloff, volume has boomed. The big money has returned... and it's selling right now.

Saturday, October 3, 2009

Investment legend says strong rally will continue

Steve Leuthold, 71-year old market veteran and head of Leuthold Weeden Capital Management, sees stocks continuing their rally into next year. Leuthold turned bullish late last year after his Grizzly Short Fund returned 74% during 2008's decline.

Leuthold thinks the S&P 500 will reach 1,350 early next year as the economy recovers. He says that things aren't great but they're getting better, and the rally has momentum and positive psychology on its side.

He currently likes technology, biotechs, and foreign banks, but says he won't touch American banks, because he's concerned about exposure to commercial real estate.

The 2 biggest oil producing countries you've never heard of...

When it comes to crude oil, Nigeria and Angola aren't exactly household names like, say, Saudi Arabia. Yet these two West African countries are currently the fifth and sixth top exporters of crude oil to the U.S., exporting 668,000 bpd and 504,000 bpd, respectively.

But Americans aren't the only ones buying up African crude. Guess who else wants to poach our sources?

China, of course.

China's thirst for oil is on the rise; the International Energy Agency forecasts Chinese crude oil demand to grow to 8.3 million bpd for this year, only to increase to 8.6 million bpd in 2010. With domestic production basically flat, China must import almost two-thirds of the oil it needs, even as demand just keeps going up. Thus, the emerging giant has turned its eye toward Africa.


Today's chart is a reminder that one of the world's most popular bets is one that will drive you nuts: It's the past seven years in U.S. interest rates.

Folks love to predict interest rates. Real estate agents always predict higher rates and remind you to "lock in a low rate now." Speculators study all kinds of government reports to guess where interest rates are going. And many folks believe Uncle Sam's creditors will demand higher rates in order to compensate them for loaning to a risky borrower.

We track interest rates with the benchmark 10-year Treasury note. Back in May, the market blessed the "rates are headed higher" camp when this note's yield reached a six-month high around 3.3%. Rates then surged toward yearly highs around 4%. But in the last two months, rates have plunged below 3.3% to reach their lowest point since May.

If you held a gun to our heads, we'd say, "Yes... eventually all this freshly created credit and money will cause inflation... and thus, higher interest rates." But we'd also point to today's chart of the past seven years in the 10-year yield and say, "Baby, it's tough to make money trading interest rates." We'll stick with greener pastures in the stock and commodity

Friday, October 2, 2009


The latest on the battle for $1,000 gold: The sellers are in charge... and they could easily get "more in charge."

We don't need to overthink gold's uptrend. Gold is rising due to its centuries-old appeal as a store of wealth. With governments around the world engaged in crazed "tax and spend" policies, it's only rational to expect their Monopoly money currencies to decline in value. And for you trend followers, gold's long-term chart is a picture of the strongest uptrend in the world.

But here's a short-term consideration: As you know, we're expecting a strong rally in the dollar soon. Gold typically trades in a mirror image of the dollar. When the dollar is weak, gold rises. When the dollar is strong, gold falls.

Let's all keep this in mind: The dollar has enjoyed two solid rallies in the past six months. Both helped send gold down more than $60 per ounce. Both presented great gold buying opportunities. The third dollar rally will be no different.

Thursday, October 1, 2009

This quarterly result can really have an impact

Are you aware of the GDP release impact?; an event that normally has a major impact on the Forex market?

GDP (Gross Domestic Product) is normally used to gauge the health of a country, as well as to measure a country’s standard of living. Increasing GDP figures normal indicates towards a healthy economy, which is countered by rising interest rates. Negative GDP results show that the economy is contracting and is normally followed by rate reductions.

Why is this important for Forex Traders?

If good GDP figures indicate that an economy is healthy, then that economy will often attract investments, having an effect on the country’s currency.

For example a better than expected GDP figure in Europe will often show that the European economy is improving – This situation is often countered by rising interest rates and can cause the Euro to gain in value.

As shown on the following chart the GDP figure normally has a tremendous impact on the daily movement, often sending the currency pairs into a huge intraday trend.


After months and months of steady declines... and after the whole world hates the thing... it's time for a dollar rally.

Remember, you can view currencies like the "stock" of a country. When times are good and its finances are in order, a country's currency tends to rise. When times are bad and its finances are a mess, a country's currency tends to fall.

Today's chart displays a "mess." It's the 13% decline in the dollar from its March peak – a giant fall for a major currency. The market doesn't think much of Washington D.C.'s new "tax and spend our way to prosperity" idea.

But as our colleague Jeff Clark has covered in Growth Stock Wire, the negative sentiment toward the dollar is at extraordinary levels... so a solid rally lies ahead. And last week, we saw a bit of price confirmation for this trade...

The dollar index struck a low at 76.25 early this month... then started moving higher. It looked like the bottom was in until sellers pushed the dollar down even farther. This last selling surge had no power, however, and the dollar climbed back to its highest point in three weeks. Everyone hates the dollar, but it's rising... which is a great bullish sign.

This Asset Is Like Gold, Only Better

In the past few years, there's been an explosion of investor interest in "hedges."

Investors want to own foreign real estate for a hedge against a big depression in the United States. They want to own gold for a hedge against a dollar crisis. They want to own oil for a hedge against inflation.

But consider this "hedge factor"...

Between 1941 and 2002, average farmland values outpaced the growth of inflation by 2%.

In fact, some call farmland as good as gold with yield – because you clock in steady income from rents while you wait for the value to grow. I can think of no better asset to own during any kind of financial crisis.

In some ways, farmland is even better than gold or silver. At least farmland is an intrinsically useful thing. It provides a tangible yield in the form of good things from the earth. We all have to eat. As consumers trim their sails, they'll give up a lot before they give up their calorie intake.

Governments, particularly in times of crisis – like now – have a tendency to flood the system with money in an attempt to "goose" the economy. Mostly, such efforts have succeeded in destroying the value of the currency in question.

Anyway, if you believe that we will continue to feel the bane of inflation, then farmland's performance in the 1970s will give you some comfort... While you lost half of your money in the S&P 500, your farmland kept its value nicely. Again, I think that's rooted in the fact that farmland is intrinsically useful. It produces useful and needed things.

Now imagine what farmland might do in today's climate, in which you have not only the likely prospect of inflation, but also a tightening supply of farmland and rising demand for crops. You have biofuels eating up more of our grain supply. I imagine you'll do quite a bit better than in the 1970s.

Farmland treated British investors great just last year. As British housing prices collapsed in 2008, British farmland value rose by 21%. Over the last five years, Brit farmland rose a total 135%. Forget commercial property. That's not a bad ROI in my book.

And there's one more way to look at it: This hedge can outperform gold. In Britain, the farmer outpaced the gold owner. Expanding land values rode up 115% since 1983, versus gold at 81%. You can be sure institutional investors are already placing their long-term bets. Almost half the farmland bought there last year was snapped up by banks and funds.

The obvious investment conclusion: If you're worried about the dollar, the economy, or any other problem, buy farmland today. This is hard to do directly through the stock market... so I encourage you to consider a private deal. You can play agriculture through companies that manufacture irrigation equipment, produce fertilizer, or operate grain-handling facilities.

Check these investments out soon. I think we're in for broad farmland/agriculture rally that should be good for hundreds of percent returns. As you can see from farmland's past results, it's a great hedge in all kinds of environments.