Wow, what confusion in the markets, eh? One day the Dow Industrials are up 100 points or so, the next day it’s down sharply. One day gold is down $15, the next day, it’s up $12.
One day silver is collapsing again, another trading day, it’s roaring higher. One day the bond market is soaring higher signaling deflation, the next day it’s cratering, worried about inflation.
I’ve been around these markets a long time. Thirty-three years to be precise. I’ve traded tens of billions of dollars, mostly in the wild and wooly futures markets. And quite frankly, I have never seen such volatility, in any market. Period. It’s amazing.
But it’s also not surprising. The post-Bretton Woods fiat monetary system is breaking down. A new global financial architecture and monetary system is desperately needed. Everyone knows it.
That’s never been more true than it is today. Not just because of the massive debt crisis that is affecting the developed world, but because the emerging markets — which represent fully 84% of the world’s population — are growing like never before.
The problem is, the wild swings we’re seeing in the markets will not abate. They are bound to increase in the weeks, months and years ahead. Until the authorities around the world realize themselves that the world is changing.
Until then, the fact of the matter remains that your wealth and the wealth of your children and grandchildren are totally and unabashedly at risk.
Today, though, I want to take a step back from the day-to-day swings in the markets and do another Q&A column, culling some recent questions from readers.
This way, I can help you keep the bigger picture in focus. Plus, you’ll know what others are thinking and asking, and, of course, what my answers are (or at least my visions of the futures are). So let’s get started …
Q: How would a future single world currency impact the price of gold once it’s introduced?
A: The question should not be how it will affect its price, but its value. Let me clarify: Suppose gold is trading at $7,000 per ounce just before a new world currency is introduced. And let’s suppose that one new world currency unit equals $1,000 U.S. dollars. An ounce of gold would then be valued at a price of seven new world currency units.
In other words, the value and purchasing power of gold remain the same; the only thing that changes is the denomination of the currency.
You might think, “well, then nothing has really changed.” And in the strict sense of the matter, that would be true.
But, a single world currency would not be introduced in a vacuum. It would (most likely) be introduced based upon a basket of internationally traded commodities. So its purchasing power — and value — would be equivalent to whatever it is at that time.
Also, and no matter what, one must realize that when a new world currency is finally introduced, it will be in the context of a wildly inflated world; in other words, asset prices will have inflated because of the depreciation that’s being deliberately unleashed by central bankers to push up asset prices relative to private and public debt levels.
Then, the system gets reset, or rebooted, if you will, to reflect a new balance sheet, if you will.
In the end, a new monetary system and a single world currency for international trade will be a good thing. Unfortunately, getting there will be the hard part as there is simply no one in Washington or any other government in the world that will fess up to what they’re doing: Inflating asset prices.
So it remains up to you to see through it, and protect and grow your wealth.
Q: Larry, since gold has been going up since 2000/2001 above the rate of inflation, does that mean we have been in a deflationary period ever since? Does this make the deflation/inflation argument mute?
A: Excellent questions! In the sense that gold now buys you much more of many other assets, especially stocks and real estate, the answer would be YES, for those particular assets. Indeed, they have deflated relative to the price of gold.
Naturally, other asset prices, such as the price of oil or food in general, have inflated along with the price of gold.
Bottom line #1: All asset prices and value are relative, and …
Bottom line #2: Inflation and deflation are two sides of the same coin. One does not exist without the other.
However, that does not make the argument mute, because in order to protect and grow one’s wealth, one has to know which asset prices are inflating, versus which are deflating.
Q: Do you think Keynes idea of the “Bancor” as the world international trading currency [is viable]? Is it possible for governments to give up their monopoly on money entirely?
A: Actually, I think central banks, especially the U.S. central bank, should give up their monopoly on money and credit. The ability to create money and credit should be a function of the government and not a central bank.
Having said that, a government’s ability to create and control money and credit needs to be removed from those in power and pegged to an objective medium of exchange.
The best way to do that is to use a commodity-basket, which will rise and fall in value according to the natural expansion and contraction of global economic growth and other factors, such as global population growth and more.
The IMF, the World Bank and the United Nations all endorse similar proposals, but none of them have gone far enough yet in working out the details.
Q: Since the exchanges have the ability to raise margins, like they did recently with silver, can’t they squash market rallies whenever they want, no matter what the commodity, or stock market, for that matter?
A: Short term, yes. Long term, no. Long-term trends are far more powerful than any exchange, government, and central bank.
Q: Larry, gold seems to be in trouble here. Are you concerned?
A: Not in the least bit. Yes, gold could and probably will pullback. But keep the long term in view. Gold is real money whose value is going to continue to appreciate in the years ahead.
Q: It was recently revealed that George Soros dumped some $800 million of gold. Since he’s getting out, shouldn’t we be?
A: No. First, no one really knows for sure how much gold he has, therefore, we don’t know whether he sold all of it, most of it, or a modest amount.
Second, we don’t know what he’s doing with the gold he sold. In fact, most of the gold he sold was via shares in the SPDR Gold Trust ETF. He could have been selling that gold and switching to actual physical gold that he’s storing in his own bank. Or, buying gold miners.
Keep in mind that you almost never get the full story from the press, no matter who issues the news, or who they are talking about. Nor do you ever get the full story from any investors, especially big ones like George Soros.
Bottom line: Never make any decisions based on news reports alone.
Q: The dollar is rallying again as the euro sovereign debt crisis erupts anew. Does this mean we are just seeing the dollar and the euro seesaw lower over time, due to both countries’ problems?
A: You are precisely correct. Both the euro and the dollar are losing purchasing power and in bear markets. Sometimes the U.S. dollar loses more, and sometimes the euro takes the lead.
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Q: Larry, the Chinese yuan is not appreciating as quickly as you thought. What gives?
A: True, the yuan is not moving up as quickly as I expected. But I have no doubt it will. At the recent pow-wow in Washington, Beijing agreed to …
Increase its domestic savings interest rates to coax Chinese savers into saving even more.
Q: I watch your UWD videos, Larry, but the markets move so fast these days. Where’s support and resistance now in gold and silver?
A: Keep your eyes on the $1,477 level in gold as important support. If it gives way, expect to see a pullback to $1,425. On the resistance side, gold will find some selling between $1,525 and $1,545.
In silver, major support lies at $32. I expect that to soon give way, leading to a decline to $30, then $28 and quite possibly $23. Resistance lies at the $39 to $40 level.
Q: You have not written much about Asia lately. Why and what’s your view?
A: Great question! The simple reason is that with all the action in gold and silver over the past few weeks, and so many of my readers heavily invested in the precious metals, that’s where the urgency is.
But I am as bullish as ever on Asian economies, and emerging markets in general. The weakness in the dollar — and the euro — continues to drive investment capital into emerging markets. And consumers in emerging markets continue to drive economic growth throughout the developing world.
I have a good portion of my own net worth invested in emerging markets. And those investments are thriving.
Best wishes, as always,
Larry
P.S. For just $99 a year you can join my Real Wealth Report and get ALL of my timing signals, recommendations, risk reduction strategies, insights into the markets, and more. It’s a freaking bargain. Join now by clicking here.
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