James Grant Questions Dollar Validity

Monday, December 22, 2008 | posted by RedApple
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Let me start this commentary with the final paragraph from Grant's latest article on WSJ (WSJ - Is the Medicine Worse Than the Illness? - James Grant - 20 Dec 2008 ):

After Mr. Bernanke gets a good night's sleep, he should be called to account for once again cutting interest rates at the expense of the long-suffering (and possibly hungry) savers. He should be asked to explain how the central-banking methods of the paper-dollar era represent any improvement, either in practice or theory, over the rigor, elegance, simplicity and predictability of the gold standard. He should be directed to read aloud the text of critique by Elihu Root and explain where, if at all, the old gentleman went wrong. Finally, he should be directed to put himself into the shoes of a foreign holder of U.S. dollars. "Tell us, Mr. Bernanke," a congressman might consider asking him, "if you had the choice, would you hold dollars? And may I remind you, Mr. Chairman, that you are under oath?"

James Grant wrote an excellent article. It is a must read for all our readers. It summarizes all our thoughts and worries about the coming failure of US Dollar and other fiat currencies. Although our timing may not be perfect but we still believe short US Dollar, short Treasury, Long Gold and commodity will be the best investment for the medium and long term (see Gold Boom Doom - Gold Outperformance to Continue into 2009 - 26 Dec 2008). At the moment, it is hard to imagine how FED and other CBs may soak up the excess liquidity after the "hopeful" economic recovery. We believe that Gold is the best defense and offense. (you may also be interested in: Gold Boom Doom - Marc Faber Reiterated Buying Gold and Gold Stocks - 21 Dec 2008)

Here are few posts of interest:
  1. Deleveraging Creates bubble in Treasury - 24 Dec 2008
  2. US Debt Approaches Insolvency - 25 Dec 2008
  3. SafeHaven - Obama's Spending Spree Won't Rescue the US Economy from Recession - 28 Dec 2008

WSJ - Gold's Power Is Keeping Up Despite It All

Monday, December 22, 2008 | posted by RedApple
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WSJ's Ahead of the Tape column asked this question today: "Many corners of the market are fearing deflation. So why is it that gold isn't selling off sharply?".

Here are some important quotes from the article (WSJ - Gold's Power Is Keeping Up Despite It All - 22 Dec 2008):

... Says Malcolm Southwood, commodities analyst at Goldman Sachs JBWere in Australia, "I'm telling clients that the environment over the next five years is extremely constructive because of the inflationary risks further out."
Near-term gold could still demonstrate some weakness as the last of the panic trade peters out. And if the European Union cuts interest rates, as some expect, that could boost the dollar's value, which could undermine gold. And U.S. and European Central banks could sell gold to raise cash to pay for bailouts, which would be bearish for gold prices. But Mr. Southwood suspects Asian central bankers looking to diversify reserves would grab that supply, seeing the sales as "an alarm signal about the dollar."
And what if deflation does hit? Even that doesn't necessarily spell doom for gold, as some think. During the deflationary Great Depression, "gold preserved its value," says Matt McLennan, a lead manager at First Eagle funds, which runs a gold fund. "It preserved its purchasing power."

***** Update 28 Dec 2008 - for latest news and charting for Gold and Gold stocks, please check updates from our blog: Gold Boom Doom - Gold Related Blogs

When you read this article today from Bloomberg (Bloomberg - China Cuts Key Rates for Fifth Time in Three Months - 22 Dec 2008 ) you will realize that either Chinese Government is desperate to boost growth or playing catch up with US Fed. The People's Bank of China announced today that the one-year benchmark lending and deposit rates would be cut by 27bp. 1 year lending rate is now 5.31% and 1 yeaer deposit rate is now 2.25%. In addition, PBoC cuts bank reserve's requirement ratio by 50bp.

We suspect that in addition to our articles regarding how China need to address the export and FDI drag on its economic growth numbers (see Search Our site for keyword China). With oil down below 40usd and most commodities weak (see chart - CRB at 2002 levels), we expect that inflation in 2009 for China will be substantially lower. Lower commodity prices will help to relief some of the earlier pressure of price increase for the national price fixed items such as energy and gas. Both expected negative PPI and CPI will give China more room to cut rates.

Overall, the debt burden countries are printing their way out of trouble and the emerging growth countries such as China seek to follow suit. We wonder how this world will absorb all these fiat money. We still argue for holding Gold as a long term investment.