Perhaps the greatest gift we all could receive in the coming season of year end holidays would be the final demise of the hedge fund industry. While that might not happen, we might have to settle for the end of the U.S. dollar's false rally. Before going into that though, one question. If these funds are hedged, how come they have been losing so much money?
U.S. dollar has been in a massive rally as imploding funds must repatriate dollars to repay those really unhappy investors that want their money returned. That false dollar rally seems to have spilled over into the Gold market. Each morning the funds also sell Gold in order to repay those gullible investors that invested money in them. That dollar rally, one, continues to make little economic sense and, two, seems on borrowed time.
In the first chart is plotted the Schmidt U.S. $ Index, which does away the distortions in the popular dollar index. That index, the black line using the left axis, has been rebased to the beginning of August. Since early August, the US$'s value has risen by more than 20%, and that appreciation has hurt the value of $Gold. Red line is annualized rate of growth in U.S. money supply, M-1 SA, since first of August.
With the U.S. money supply growing at more than a 20% annual rate, the artificially created shortage of dollars will soon be appeased. With the Federal Reserve committed to expanding the U.S. money supply, dollars will soon be in surplus. Additionally, with Obama committed to a plethora of public work projects, a great wall and pyramids may soon be announced, the U.S. government deficit will explode further. Unless foreign central banks continue committed to unlimited funding of the U.S. deficit, the Federal Reserve will be forced to monetize that debt. By the way, the U.S. government deficit correctly measured was more than $1.5 trillion in the past year.
With the Federal Reserve committed to unlimited creation of dollars and Obama committed to unlimited government spending, the U.S. dollar's value could become the Dog of 2009. That should make $Gold worth considerably more than today's value. Investors should be using any and all further price weakness in the price of $Gold to add to positions. Bush was good to Gold, and Obama will be like a gift falling from the sky to Gold investors.
Second graph is an update of one introduced earlier. Green line is monthly average price of $Gold, using right axis. Red line, using left axis, is the inflationary component within the annualized six month rate of change for the U.S. money supply, M-2 NSA. Buy signals of that monetary measure are when it turns positive from a negative value. Currently, the monetary measure is extremely bullish for $Gold. Those buy signals are marked by black triangles.
Did you hear the story earlier this year about how oil would be $200 by year end? Well, slight revision to the popular prognostication. Oil will now be $10 in the Spring. First forecast was used to rationalize buying commodities and Gold. Second one has become a rationalization for selling commodities and Gold. We suppose the gurus will get it right soon, but thus far a broken clock has a better record.
Did make a modification to the closing wisdom of our last note. It now reads, Wealth once lost to the tyranny of paper money and spendthrift politicians is never regained!
GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS
as part of a joyous mission to save investors from the financial abyss of paper
assets. He is publisher of The Value View Gold Report, monthly, and Trading
Thoughts, weekly. To receive these reports, go to