From the beautiful Bahamas, I wish you the very best for 2015. The year just ended has seen tremendous gains in a few areas including large cap US stocks, coffee, and long term treasury bonds – while currencies, gold stocks, and most commodities saw big declines.
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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Reader Daniel P wrote in a recent comment on the Half-Life of the US Dollar page:
Dear Sir Charles, thank you for an exciting and informative site it is much appreciated.
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I just received a call on the Priced in Gold Hotline asking for clarification about ounces and grams of gold and other precious metals.
First off, precious metals prices are most commonly quoted in US Dollars per troy ounce. We all haves a pretty good idea of what a dollar is, but a troy ounce is something we don't often see in any other context. It isn't the same as the ounce used in US household measures or scales… those ounces (known formally as avoirdupois ounces) weigh 28.3495 grams, and come 16 to the pound. Troy ounces weigh about 31.1035 grams, and come 12 to the troy pound. (Note that the word "ounce" comes from the latin for one-twelfth.)
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All asset classes but oil, silver, and mining stocks were higher this week.
Bitcoin ended the week up 57.6% at 2,724 mg, after setting another record high almost every day for the last 2 weeks. Interest in the online currency has continued to skyrocket as news spread that the "bail-in" plan that seized up to 80% of large bank deposits in Cyprus has been approved for future use in the US and Canada as well as in the rest of Europe. After this tremendous run-up, a pullback is to be expected. Note that BTC could fall over 80% to 500 mg or so and still be in an exponential uptrend! Expect further volatility.
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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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It was a mixed week, with most government currencies and most commodities lower. Bitcoin closed Friday on another new all-time high of 673 mg, up 12%. The free market online currency is truly in uncharted waters now, and although serious pullbacks are to be expected as price discovery continues, I would still recommend getting on board now. As Bitcoin's user base is expanding rapidly, there is every reason to expect that the price will be much higher a few years from now – provided, as always, that the currency doesn't blow up! So keep investment positions small enough to suit your risk tolerance.
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Another good week for everything but resources, but an exceptional week for Bitcoin, which closed Friday on a new all-time high of 601 mg, up 15.4%. The old high, set back on 9-Jun-2011 at 598.3, was achieved suddenly – tripling from 200 to almost 600 in just 8 days and 188 kg of trading. This time around, it took 100 days and 1349 kg of trades to move from the 200 to the 600 level. It will be fascinating to see whether we continue higher from here, or pull back and spend some time consolidating first. Either way, some bitcoins should be part of your speculative portfolio. Although the possibility of Bitcoin going bust is very real, the upside potential is huge. If Bitcoin is still around in 5 years, I'd be very surprised if 1 BTC wouldn't buy more than 1 oz of gold.
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Bitcoin, which has been rising strongly for the last month, kicked in the afterburners this week, gaining 23.8% to close at 386.3 mg. This blew through the resistance I expected at about 350 mg, and leaves the way clear for a retest of the all-time high of 598.3 mg set in June of 2011. Nonetheless, a pullback to support at 350 or even 300 before moving higher should not come as a surprise.
More on Market Update 1 Feb 2013 – Bonds down, Bitcoin up up up!
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I have received several questions lately along the lines of, "What do these charts mean?", and "How do I interpret this chart?". This post is an attempt to answer these questions.
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