monetary universe

I'm getting calls to the Priced in Gold hotline, emails, questions from friends – all asking the same thing: "Have you seen the 2011 Berkshire Hathaway annual report and Warren Buffet's comments about gold?"

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US Bonds were higher this week, recouping last week's losses and more. SHY gained 3.1% in line with USD strength, and TLT gained 6.4% reversing last week's 2.1% loss. Over the longer term, TLT is now up for the year, while SHY is down around 20%. As the crisis in Europe deepens, US Treasuries may make further gains; but keep in mind that these are highly volatile speculations, not a safe place for your savings or a good source of income.

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As the wheels come off in Europe, be prepared to take advantage of any pull-backs in physical gold, silver, platinum, and in mining stocks.

Volatility is high as rumors circulate about the latest bailout plan, change in leadership, and massive public demonstration. Do not let this fool you: governments will create the currency to kick the can down the road. It's a game of musical chairs, and nobody wants the music to stop on their watch.

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In early September, gold was over $1900, and seemed ready to push for the $2000 level. By the end of September it had fallen to $1650, after dipping as low as $1550. Since then, it has continued to trade in the mid-1600s. Is this the beginning of a gold crash? Is the "gold mania" now behind us?

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The last few days have been a wild ride for investors. With cracks in the Eurozone widening, new Fed promises of ultra low interest rates for the foreseeable future, riots spreading across the UK, and continuing unemployment in the US, there can be little doubt that massive currency debasement is now "baked into the cake".

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The last week has seen a series of new lows for the USD, ending at 19.42 mg on Friday. A lack of agreement on raising the US debt limit, terrorist attacks in Norway, and a massive 3 notch cut in Greece's credit rating by Moody's all contributed to an additional spike down over the weekend. The EUR also made new lows last week, as did the JPY. The CAD is hovering just above its all time lows, as well. All of these currencies are down strongly from a year ago, 25% for the USD, and about 17% for the others.

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Today the USD hit a new all-time low of 20.02 mg. What more is there to say? Until real interest rates turn positive, or the US economy shows signs of real recovery, the appeal of the dollar is very limited. With the end of QE2 in sight, the Fed is faced with a tough dilemma: go for another round of money creation with QE3, or see the economy really start to fall apart around it. The true question is not "if" there will be more quantitative easing, but "how soon and how much".

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I've been studying the US Dollar lately… Looking at where it's been, and wondering where it may be headed in the future.

In February of 2001, the US Dollar would buy about 121 mg of gold. In March of 2011, it will buy about 22 mg of gold, a decline of 82%. This drop has been gradual, and the intervening years have been filled with the sell-offs and rallies that are common to all markets. This period has been characterized by massive and growing public and private debts, central bank manipulation to keep interest rates artificially low, and the creation of trillions of new dollars to keep the financial system liquid and stave off recognition of personal, corporate, municipal, state and federal bankruptcies.

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