As the global monetary system cracks, gold surges

The three major US stocks indices, DOW, S&P 500 and NASDAQ had the worst week since the 2008 financial crisis. The DOW lost -5.75% during the week, erasing all gains made since the beginning of 2011. The S&P 500 Index plummeted -7.19% to settle at 1199.38, the lowest level since November 2010, and the NASDAQ was down -8.12%. More importantly, all three indices broke through key support levels of head and should patterns which could have very bearish implications.

The Asian stock markets tumbled on Friday with Japan down -3.72%,China-2.12%,Australia-4.00%, South Korea-3.69%,India-2.19%. Asian stocks tumbled on concerns that the world economy is weakening and demand will dwindle for Asian exports. Australian stocks also sank after the RBA slashed its 2011 economic growth forecast forAustraliato 2.0% from its previous estimate of 3.25%.

The CRB commodity index dived through key support level at 326 to extend the medium term decline. The price of crude oil was down -9.22% while the price of gasoline, wheat, corn, soybeans and silver all fell sharply in what was a broad based sell-off. Gold, on the other hand, showed marked resilience and remained relatively firm.

As investors exited the stock market, safe haven flows boosted US treasures, where 2 year yield made record lows. As I have mentioned countless time before, it is beyond my comprehension, why investors would want to put their money into US Treasuries. Gold was also a recipient of safe-haven flows, but this I understand perfectly, and it makes good common sense.

In the currency markets, the commodity currencies, of the Aussie, and the Canadian dollar were the biggest losers, reversing most, if not all of July’s gain. And, there are renewed signs that the global currency war is about to get worse and expand to other countries.

Last Wednesday, the Swiss central bank unexpectedly cut interest rates and said it will increase the supply of francs to money markets to curb the “massively overvalued” currency. The franc has surged 10% against the euro over the past two months as Europe’s debt crisis worsened, hurting Swiss exports and economic growth.

The SNB said that the “global economic outlook has worsened” since its last rate meeting in June. At the same time, the franc’s gains have “accelerated sharply during the last few weeks” and the outlook for the Swiss economy has “deteriorated substantially” as a result, it said.

The franc’s strength is “threatening the development of the economy and increasing the downside risks to price stability in Switzerland,” the SNB said. Policy makers, led by Philipp Hildebrand, are “keeping a close watch on developments on

the foreign-exchange market and will take further measures against the strength of the Swiss franc if necessary.”

A day later, theJapan sold one trillion yen ($12.5 billion) and loosened its monetary reins joiningSwitzerlandin efforts to tame currencies buoyed by safe-haven demand from investors looking to protect their wealth.

Finance Minister Yoshihiko Noda saidJapanhad consulted its international partners, but intervened on its own to stem what it considered speculative and disorderly currency moves. Hours later, the Bank of Japan increased their buying of financial assets to 15 trillion yen from 10 trillion yen, under a scheme established in October 2010 to shore up market confidence and support the economy.

Traders saidJapanhad sold more than one trillion yen in intervention so far on Thursday, a day after the Swiss central bank surprised markets by cutting interest rates to try to weaken the Swiss franc.

Later on Thursday, the European Central Bank (ECB) left interest rates unchanged as the region’s debt crisis spreads toItalyandSpain, increasing pressure on policy makers to resume bond purchases. ECB officials meeting inFrankfurtkept the benchmark rate at 1.5% after lifting it by 25 basis points last month, as predicted by all 54 economists in a Bloomberg News survey. With yields on Italian and Spanish bonds near euro-era records and the economy showing signs of weakening, European leaders are under pressure to act.ItalyandSpainare seen as too big to bail out with the euro-zone’s current rescue facilities.

While the EUR/USD pair fluctuated widely on a daily basis, the markets got jitterier by the day. And, all of this happened before S&P downgraded US’ rating to AA+ (from AAA) after theUSmarket closed on Friday. Over the weekend, European central bankers held an emergency conference call on Sunday to discuss latest development in the debt crisis. It is believed that G7 leaders will also hold a conference call on both issues.

Over the next few days one can expect many market commentators to criticize this unprecedented move taken by S&P, but no matter what you like to believe theUSnational debt is spiralling out of control.

“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” S&P said in a statement.

The outlook on the newU.S.credit rating is “negative,” S&P said in a statement, indicating another downgrade was possible in the next 12 to 18 months.

The move reflects the deterioration in the global economic standing of theUnited States, which has had a AAA credit rating from S&P since 1941, and it could have implications for the U.S. dollar’s reserve currency status.

According to PIMCO’s Bill Gross, “In addition to an existing nearly $10 trillion of outstanding Treasury debt, theU.S.has a near unfathomable $66 trillion of future liabilities at net present cost”

“We are at a tipping point,” Gross said, adding that the firm has reduced its forecasts for economic growth in the second half of the year.

“The Fed is approaching a dead end in that all they can do have been done.

“There’s the potential for QE3, but that may take the form of extended language.”

“Sisyphus would be familiar with this seemingly unsolvable dilemma,” Gross wrote, referring to the mythological king who was punished by being repeatedly compelled to roll a boulder up a hill, only to have it roll back down again.

While I am not sure of the solution, I am certain that the current Keynesian economists and bankers will opt for further stimulus, even though all the previous rounds of stimulus have merely protected bondholders at the expense of taxpayers. And, as stated by Bernanke himself, the Fed’s action was supposed to get credit flowing again stimulate economic growth, maintain price stability and create jobs. Instead, the Fed bailed out US bankers and wealthy bondholders, economic growth has been sluggish, prices of commodities surged and unemployment remains high. In addition, the dollar looks more precarious than ever. Interestingly, in August 2008 the dollar index was trading around 74, much the same as it is now. Yet, the gold price has gone up from $700 to $1700 an ounce. There are more problems with the US dollar now than there were three years ago which tells me that the only reason why the dollar has held up us because of the weakness in the Euro. I maintain that both of these currencies are overvalued and we will see further declines in the coming months.

One thing for sure, I wouldn’t pay any attention to most of the forthcoming government rhetoric. I wouldn’t be surprised to see Timothy Geithner and Donald Trump form a duo and blame all of these problems on China. My point is, don’t believe what you hear, and take steps to protect yourself – diversify some of your assets into gold and silver. And, if you are located in the USA, insure yourself by having a bullion account outside of theUSA. And, if you are in South Africa, stop listening to all the bad advice you have been given about gold for the last 10 years or so from your financial advisors.

On Monday, the price of gold broke through the $1700 an ounce level. It seems as if the price has some more upside before correcting.