Gold, silver, copper and virtually every commodity under the sun are going even more ballistic than in recent weeks.
Just yesterday, the June gold contract literally zoomed to $728 per ounce before ending its day session at $721.50, up $15.80!
Silver, which just busted the $14 barrier on Wednesday for the first time in 26 years, kept right on skyrocketing yesterday, almost reaching $15 before settling at $14.84 a rip-snorting gain of 65 cents.
Copper put most other metals to shame. For the first time in history, it smashed the $4 barrier … and then surged as high as $4.16.
Oil jumped. Bonds fell. U.S. tech stocks plunged. In short, virtually everything weve been warning you about is here in aces in spades.
Now Get Ready for
The Real Fireworks!
This explosion in commodities is no fluke.
Nor is it a temporary phenomenon.
It is driven by powerful, fundamental supply-and-demand pressures that have been building up for many years and are just now beginning to manifest themselves.
Even the immediate trigger of this weeks surge fits perfectly into the classic scenario of run-away commodity prices.
Im talking about the outright failure of the U.S. Federal Reserve to do or say anything that might slow down the commodity price explosion.
Thats why on Wednesday, minutes after the Feds announcement, commodity prices turned sharply higher.
Thats why they went through the roof yesterday.
And thats also why, despite temporary corrections, theyre bound to keep going and going.
But in my view, nothing can drive gold, silver, copper, oil and other commodities higher and faster than …
The Falling U.S. Dollar
Right now, the dollar is already falling and doing so at a quickening pace.
Its falling against the euro, the Japanese yen, the Swiss franc, and even the Brazilian real. And yesterday, it plunged again, especially against the British pound, losing a whopping 200 points (2 full cents) in one fell swoop.
This is important: The dollar decline could have more impact on your financial future than the latest rise in the Dow or even latest interest-rate decision by the Fed. Depending on the choices you make, it has the potential to gut your investment portfolio … or send it soaring. Indeed, this new phase of the dollar decline is bound to:
- drive U.S. bond prices into a tailspin …
- drive up the interest rates on long-term bonds, commercial loans and all forms of mortgages …
- crack open the U.S. housing market not only because of rising mortgage rates, but also because fewer foreigners are willing to speculate on American real estate …
- ultimately force the Fed to start a whole new round of interest rate hikes to attract foreign money back to the U.S., and …
- send contra-dollar investments gold, silver, oil and other commodities into a new, rip-roaring surge.
This is not merely our forecast of the future. We can see many of the signs right here and now:
Already, the dollar has fallen through key thresholds on the charts, especially against its largest competitor as a world currency the euro.
Already, the dollars decline has helped precipitate a parallel decline in U.S. bond prices. Indeed, most of the dollars held by foreigners are invested in U.S. Treasury securities. So when theyre selling dollars, theyre also selling bonds, driving down their prices in tandem.
And already, the falling dollar is driving oil prices sharply higher, with oil up another $1.25 just yesterday.
Remember:
Gold, silver, copper, oil and other commodities are priced in dollars. So just to maintain the status quo, producers must charge more to offset the lost revenues caused by the dollars decline.
But if you think the dollar decline might be temporary, just consider the seismic pressures that could erupt at any time …
Seismic Pressure #1: The Record U.S. Trade Deficit. Right now, the U.S. is importing approximately $800 billion more than its exporting, the single largest trade gap of any country in the history of civilization.
The reason for the gap is undisputed: Americans have been acquiring foreign goods in a wild, nonstop buying-and-borrowing frenzy. But most foreign consumers have been avoiding U.S. goods like the plague.
Any other country with a trade deficit as large as ours would have suffered a currency collapse years ago. And with that currency collapse, the value of their stocks, bonds and real estate would have also fallen years ago.
But due to the huge flow of dollars back to the United States, we were spared a similar fate and given an extra lease on the good life. Our money was not gutted. As a nation, we got a free ride a ride thats now coming to an abrupt end.
Seismic Pressure #2: Biggest Mountain of Foreign Debts Ever.
After years of record trade deficits and years of selling our assets to foreigners, guess what: Foreign investors now own a big chunk of our stocks and bonds approximately two and a half trillion dollars worth.
We have been binging. And to finance our habit, we have sold the farm. Dollar by dollar, piece by piece, we have auctioned off our assets to cover the consequences of our seemingly incurable spend-and-borrow addiction.
Seismic pressure #3: Shifts in Confidence. Now comes the day of reckoning: Theres nothing that requires foreign investors to continue investing in the U.S. or even continue holding U.S. assets theyve purchased so far. Like every other investor, every day of every year, they have a choice: To buy, hold, or sell.
And anytime foreign investors want their money back, we are committed to returning it to them, no questions asked. Anytime they want to sell, they can do so almost instantly.
No, theyre not going to sell their entire $2.5 trillion in U.S. securities all at once. But to sink the dollar and shatter our bond markets, they wouldnt have to.
All theyd have to do is make a subtle shift of a few percentage points in how they allocate their investment portfolios: A few percent more for the euro or the yen … a bit more to gold and oil … a few percent less for the dollar. That alone would be enough to shake the earth and tear down the walls of the U.S. currency.
What Might Trigger an
International Flight
From U.S. Dollars?
Some of the very same changes weve been telling you about here in Money and Markets week after week:
- Many investors, especially in the Middle East, are likely to be shifting out of dollars as they lose confidence in Americas military enterprise in Iraq, and as Iraq sinks ever deeper into the quagmire of civil strife. Back in January, in Break Points, I showed you how we are about to pass the point of no return in Iraq. Now, even supposedly secure areas are in turmoil, as illustrated by the rising tide of Shiite violence against the British in Basra this past weekend.
- Others could be scared away by the showdown with Iran. Last Monday, in Winds of War, I showed you how Iran could retaliate against UN sanctions by reducing its oil exports … paralyzing the Strait of Hormuz … or worse. Now, just this weekend, Iran has renewed its threats to withdraw from the Nuclear Non-Proliferation Treaty … its president has just dismissed sanctions as meaningless … and its parliament is pushing to end unannounced nuclear inspections.
- Still other investors are running in reaction to the increasing bravado and defiance they see in anti-American oil countries like Venezuela and Bolivia. In last weeks Time Bombs about to Explode, Larry showed you how and why. Now, Venezuelas Hugo Chaves, Bolivias Evo Morales, Cubas Fidel Castro and others are forming an anti-American alliance, again using oil as their primary weapon.
- As Sean vividly illustrated in Investing for Peak Oil last week, the fact that worldwide oil production could now be in a long-term cyclical decline is only giving more leverage to all those that might defy the United States.
- And as this weeks events illustrated, the wimpy, ambiguous posture of the U.S. Federal Reserve doesnt help much either.
Clearly, the global reality has changed. Now, the only thing still holding up the U.S. dollar is the lingering global perception of that reality. Thats a dangerously vulnerable situation for our currency, for our financial markets and for you.
The Axis of Oil
by Sean Brodrick
Another major reason to expect rising gold prices and a falling dollar is the powerful Axis of Oil is emerging between Venezuela and Iran.
Consider the facts:
First, back in March 2005, the two countries signed several agreements worth $1 billion.
Second, they committed to mutual cooperation on geological and mines projects, whereby Irans expertise will help Venezuela develop its resources.
Third, the mining arrangements are so broad that they clear the way for Chavezs government to provide Tehran with uranium for its nuclear program, tapping Venezuelas uranium deposits near its border with Brazil.
Fourth, the relationship deepened in December, when state-owned oil company Petroleos de Venezuela (PDVSA) signed a deal with Irans state company Petropars to explore the heavy oil deposits in Venezuelas Orinoco River basin.
Fifth, Venezuela is lining up with Iran in its showdown with the West, opposing any restrictions on Irans access to nuclear technology.
Both regimes hate the United States.
Both regimes subsidize domestic gas prices to keep their citizens happy, putting great pressure on both governments to continually boost export revenues.
Plus, both naturally depend heavily on rising oil prices. Oil revenues brought $50 billion into Iran last year alone. And Venezuela the worlds fifth largest exporter reaped $22 billion in annual taxes and royalties from PDVSA alone. Every dollar rise in the price of a barrel of oil is more money in their coffers.
So anyone who underestimates their financial clout, their political zeal and the consequences of their actions could be making a grave error.
And with virtually no slack in global oil supply and demand (at just over 85 million barrels per day), it doesnt take much to upset the equilibrium and send oil prices skyward.
Together, Iran and Venezuela pump about seven million barrels of oil per day. Thats about 8% of total world output, or 23% of the total pumped by OPEC last month. Working together they can shake the market. Heck, they can shake the world.
What if Venezuela starts selling large amounts of oil to energy-thirsty Asia, and tells Uncle Sam to go find its oil elsewhere? What if the showdown with Iran escalates into a shooting war, and Venezuela announces an embargo to support its brother nation? Is the market pricing that in?
My answers: Just the fear of these scenarios unfolding could help drive oil prices much higher than $100 a barrel. And Im not even figuring in hurricanes in the Gulf of Mexico or potential terrorist attacks.
The Case for
$2,100 Gold
by Larry Edelson
Gold is now just $18.50 shy of my next target of $740 an ounce! Wow! That happened even faster than I myself expected.
But right now, gold is still so grossly undervalued, its a joke.
In terms of todays dollars, gold reached $2,176 in 1980. And that was at a time when the demand for gold was far less sustainable than it is today … and the supplies far more abundant. In other words …
Gold will have to nearly triple to more than $2,100 an ounce just to regain the same purchasing power it had 26 years ago!
Look. Historic records are being broken every single day in the metals markets.
Even without considering inflation, coppers all-time high in 1980 was $1.43 per pound. Now its selling at more than double that level. Zinc, aluminum, and tin have all busted through their highs. So if anything, gold has a lot of catching up to do, and what youve seen so far is just the opening act, with the big show still to come.
Let me sum up my reasons with the following statement:
All of the same forces that have propelled gold from $225 an ounce to $721 are still alive and kicking. They will lead to much higher prices in the months and years ahead … signal more inflation … and sadly, they will reflect a deepening socio-political crisis both domestically and internationally.
Martin told you about the seismic pressures under the dollar. Now let me tell you about the additional forces driving gold …
1. The United States is effectively bankrupt. And that fact will continue to cause millions of jittery savers and investors to seek the safety and security that only gold can provide!
2. Washington Has Lit the Fuse on a Devastating New Explosion Of Domestic Inflation. Washington has been literally flooding the U.S. economy with brand-new paper dollars for nearly five years now.
3. The War Environment. You dont need a bloody war to frighten investors. Long before the first shot is fired, many are already seeking out gold as a hedge far more actively than ever before. And as the war drums beat louder, the gold rush could easily turn into a stampede.
Meanwhile, on the supply side of gold …
Central bank sales of gold are virtually non-existent. Instead, central banks are starting to buy!
The gold carry trade is dead. When gold prices were falling in the 1990s, traders made a fortune borrowing gold from central banks at dirt-cheap interest rates of 1% to 2%, selling it and then reinvesting the money in higher-yielding Treasuries.
But now, with gold prices soaring … with short-term borrowing rates at 5% the gold carry trade has ended, eliminating the 10,000 to 15,000 tons of extra supply this practice often added onto the market.
Forward-selling by mining firms is being sharply reduced. In the 1980s and 1990s, as gold prices retreated, many mining companies began hedging their bets. To protect themselves from future price declines, they locked in current prices by selling future production gold that was still in the ground. That also effectively added to the supplies hitting the market.
Given golds rise, mining companies are leery of new forward selling. And most are actually unwinding their hedges. Instead of adding more supplies, this has the opposite effect: It removes gold supplies perhaps as much as 300 tons from the market each year. Its now a bullish force in the gold market and could be for years to come.
Marginal mines were closed and will take years to reopen. Scores of marginal mining operations were closed during golds 20-year bear market. And now, most of those mines are out of commission. Typically, closed mines decay or fill up with water. It can take years to get them back on line.
Gold exploration is drying up. Exploration expenditures by mining companies have fallen sharply since 1997. Despite golds new bull market, gold exploration expenditures are still not far from their lowest levels in nearly a decade.
Is it any wonder gold is heading even higher? I dont think so.
What To Do
by Martin D. Weiss
First and foremost, if you still hold long-term bonds, get the heck out! A 10-year Treasury note or 30-year Treasury bond doesnt yield that much more than a 3-month Treasury bill.
So what good is the extra yield over the course of a full year when the principal value of your notes or bonds can fall that much or more in less than a week?
Second, steer clear of stocks in companies vulnerable to a falling dollar and rising interest rates. That includes most in the banking and housing industry. But a falling dollar actually favors companies that derive most of their revenues from overseas operations.
Third, most of your keep-safe funds should be in 3-month Treasury bills or equivalent. You can buy them directly from the Treasury Department using the Treasury Direct program. Or, for better liquidity and checking privileges, use a money market fund that specializes in U.S. Treasuries.
Fourth, protect yourself against the falling dollar with gold-related investments that naturally rise when the dollar falls.
And if you think its too late to profit from gold, think again! You could turn golds next minor 15% move into a whopping 348% gain! And you could do it in less than eight weeks. For all the specifics, see Larrys very latest gold report, just posted last night!
Good luck and God bless!
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About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Sean Brodrick, John Burke, Beth Cain, Red Morgan, Ekaterina Evseeva, Amber Dakar, Michael Larson, Jennifer Moran, Monica Lewman-Garcia, Julie Trudeau and others.
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