money gold

National currencies, cryptocurrencies, bonds, and major stock indexes fell while commodities were mixed. The big winners were gold stocks, which rose 6.6%, and palladium, which gained 5.3%. Cryptocurrencies took the biggest hits, as Ethereum dropped 10.1% and Bitcoin fell 9.6%. Although Ethereum registered the largest loss in absolute terms, I see it as a healthy correction following last week's massive 26.9% gain.

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The huge winner last week was the Swiss Franc. The Swiss central bank did a sudden about-face last Thursday, dropping its peg to the Euro, and the CHF rose 13.4% for the week while all other major currencies fell 3%-6%.The only other asset category in the black was the HUI gold stock index, which is now hovering just below its 200 day moving average and resistance at about 5 grams. Watch closely to see if this is really a breakout to the upside or just a dead cat bounce. 

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The International Monetary Fund created the SDR in the late 1960s to supplement the gold and other currencies held by countries as their reserves. The value of 1 SDR was initially defined as the same amount of gold as 1 USD. At the time, the USD was convertible into gold, so most countries chose to hold the bulk of their reserves in dollars instead of gold.

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Many people are rightly concerned that the US Federal debt has been exploding in the last few years. A quick look at the following chart will show why:

This chart doesn't try to show all the debts of the United States, just the publicly acknowledged debt of the federal government. So it doesn't include state and local debt, and it also omits unfunded liabilities (promises to pay in the future for things like medicare and social security). This is the number that grows each year by the size of that year's deficit.

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I got a great question in my email this morning, and I'd like to share it, and my answer, with you.

Using your methods, how can one know when gold and silver are grossly overvalued? Much like the tech stocks around 2000-2001?
I don't think of it in quite those terms… I use gold as the unit of measure, and thus see it as unchanging.  The USD may rise and fall, silver may rise and fall, but gold is my constant, like cash.
If you put 1kg of gold in a safe for 10 years (or 100 years!), you will still have 1kg of gold.  No gain, no loss. Put enough $100 bills to buy 1kg of gold in the same safe, and you will probably not be able to buy anything close to the same amount of stuff with it in 10 or 100 years (if the bits of paper have any value at all!)
So taking the US Dollar first, your question would be translated as "how can one know when the dollar is grossly overvalued, much like the tech stocks in 2000-2001?"  If that time comes again, you will want to sell your dollars and go to cash (gold), just as in 2000-2001.  Conversely, we could get a bottom in the USD, as in 1980, and it might become a good long-term speculation.  I don't think that is anywhere close yet.  And there is a real possibility that the USD will continue to fall gradually for a long time, or suddenly fall a lot, or even be replaced by some other monetary unit leading to a near-zero value… so I see buying dollars as a risky speculation, but one that could be quite profitable from time to time – as indeed it has been for the last 12 months or so.
My favorite tool is the "half-life of the dollar chart".  When I see the USD moving below the half-life curve significantly, say by 10%, I start paying attention. If it starts to recover, you could be entering a period of mean reversion that would make the USD a good buy.  The main fundamental that is likely to drive the USD up would be positive and rising real rates of interest.  When the bond vigilantes ride again, it might also be time to buy USD, at least for a medium term speculation. As long as the Fed is holding interest rates low, and concern about the economy and deflation is strong, I think you are better off in cash (gold), since the Fed will be using various tricks to increase the money supply to fight these perceived threats.
Silver is a different animal; I see silver as primarily an industrial metal, with a secondary monetary appeal to smaller savers.  As such, it is quite volatile, but unlike the USD, will never be without value – and is thus a less risky speculation than the dollar.  My suspicion is that either the economy will need to improve dramatically, or the USD will need to tank, for silver to show real strength.
I hope this is helpful!
Sir Charles

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Subscriber Mark Cloney recently wrote to me with some great questions:

Hello, Sir Charles – I have a couple questions for you:

  • How can someone on a tight budget best get invested in silver and/or gold?  I don't have a lot of savings, but I do not want to see them destroyed by more and more "quantitative easing".

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Since I published Gold101 there have been some wonderful articles giving additional details on buying and storing physical gold.

The first, called "Gold coin shortage likely to become chronic" by Michael J. Kosares, outlines the reasons why gold bullion coins have been so hard to find at reasonable premiums, and why these forces will probably keep premiums high in the future as well. BTW, Michael's book, The ABCs of Gold Investing: How to Protect and Build Your Wealth With Gold is well worth reading if you are new to buying gold.

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Here are a few resources to help you move some of your savings into gold.

Remember that gold is a form of cash, not an investment. It doesn't grow in value, create new jobs, earn profits, or generate income for you. It is simply a currency that no government can counterfeit or debase. You should hold it as a way to reduce the volatility of your portfolio, or for long term saving. Don't imagine that owning gold will make you rich: If gold doubles in price due to massive creation of fiat currency, most of the other things you need to buy will eventually double in price as well. Gold can preserve your wealth, but not really grow it. For that you need real investments and prudent speculations.

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Gold is a type of money, just like Dollars, Euros, Pounds and Yen. Unlike these other forms of money, gold has been around for thousands of years, while many fiat systems have come and gone. Because the amount of gold in the world cannot be increased without finding and mining more of it, its value is fairly constant. This is in stark contrast to the fiat monies which can be created on command by governments and central banks.

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Yesterday the NY Times ran an article headlined, "Average U.S. Income Showed First Rise Over 2000".

The big claim is that after peaking in 2000, incomes fell, bottoming in 2003, and have now climbed back to make new highs in 2006.

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