The legendary financial newsletter writer Richard Russell stated in his Wednesday edition that the U.S. will eventually have to back the dollar by gold to halt its decline.
As the dollar has climbed against the euro in the wake of renewed concerns in Greece, and to a lesser extent, concerns in Portugal, both the euro and dollar have dropped in terms of gold.
The dollar: what was once the ultimate safe haven has taken a backseat to the truly ultimate safe haven asset, gold. “Is this a preview of the future?” Russell asks.
“To compete, I believe that somewhere head the U.S. will have to back its current irredeemable fiat currency with gold” he stated. “In order to do that, the U.S. will have to boost the price of its huge gold hoard to a level where the dollar may be backed anywhere from 50% to 100% with gold. That could mean unilaterally raising the price of gold to maybe $5000 and ounce or more. ..I thought that gold, closing higher, in the face of the stronger dollar, was significant.”
As most of the components of the the Conference Board’s Leading Economic Indicators (LEI) roll over, portending a downturn in the U.S. economy in the next three to six months, the Fed’s decision to halt its purchases of newly minted Treasuries in June comes at a time when the Fed’s liquidity may be needed most (many theorize).
Russell believes the numerous pundits of the Fed’s quantitative easing policies (including two Fed governors) need quelling before announcing further money printing. And a way to do that is to allow a significant market decline, or crash, as some predict, leaving little hope for employment, retail sales, production and housing gains.
“With inflation heating up as far as American consumers are concerned, the pressure is on the Bernanke Fed to ‘cool it’ on its quantitative easing,” Russell noted. “I think the stock market (now slumping) and the dollar (now rising) are reflecting this. Thus the Fed might be setting off a temporary slump in the summer economy.”
“If so, Bernanke could announce, ‘See, if we ease up, the economy eases up as well.’ All of which strengthens the case for QE3. Of course, President Obama would love a late pick-up in the U.S. economy as the nation moves into the 2012 election period.”
So what’s the game plan for investors? Russell suggests holding gold during the roller-coaster ride and to be happy you did following an anticipated Fed announcement of some form of a continuation of its quantitative easing some time in the second half of 2011.
As Bill Gross stated in March, without the Fed buying newly issued Treasuries, who will buy them? And the Fed’s plan to re-liquify the banks and to debase the dollar won’t be feasible if the 10-year Treasury yields north of 5%.
Therefore, Russell stated, “Prepare for the summer doldrums (maybe even a slump), and then be ready for an economic revival in the fall and into 2012. Also get ready for all-out inflation as the Fed steps on the QE3 accelerator in late 2011.”
He added, “I think the gold action goes along with the above scenario. Why take profits or sell your gold, when the real move in gold is slated for 2012 and beyond?”
The most ominous point Russell made was regarding gold’s record advance against sterling and the euro this past week. Investors fleeing currencies have bought dollars and gold during the recent unwind out of the anything-but-dollars trade, while gold advanced against all major currencies. If this is, indeed, a preview of things to come, more investors could wake up in horror with the realization that there is no place to hide from sovereign debt crises other than gold.
And Russell’s thoughts on stocks? That asset class doesn’t look appealing either based on his technical work. As the Fed, presumably, ends QE2, it’s also assumed that the Fed’s POMO operations to boost stock prices will also go. There’s nothing like getting the attention of the Fed’s nay-sayers with a quick drop in the Dow to turn some hearts around.
“Warning — I have applied the ‘fan-line principle’ to the NYSE Composite Index. Here we see three consecutive trendlines violated,” Russel wrote. “According to the fan-line principle, three trendlines are drawn from the same base. When the third fan-line is violated the trend has reversed and turned down. Based on this chart (above), I would not be holding stocks at this point.”