'Current Rise In Dollar, Equity Fall To Help Gold, Silver'

'Current Rise In Dollar, Equity Fall To Help Gold, Silver'

By Commodityonline | 4 February 2010

NEW JERSEY, USA (Commodity Online)— The current rise in the U.S. dollar and decline in U.S. stocks might actually strengthen the fundamentals of gold and silver. It is now more likely that Bernanke will continue to hold interest rates at 0% for a longer than expected period of time. Therefore, a rise in the U.S. dollar today could be setting the stage for a crash in the U.S. dollar as soon as late-2010, followed by the onset of hyperinflation, according to National Inflation Association of USA.

So far in early 2010, a short-term bounce in US dollar was witnessed and this was predicted by National Inflation Association in its December 21st, 'Top 10 Predictions for 2010'. One catalyst for this short-term bounce has been China's actions to cut down on lending in order to counteract their $586 billion stimulus plan, which caused China's economy to overheat and their GDP to rise by the most since 2007. Another catalyst has been comments from President Obama, which include his support of a "spending freeze" and the "Volcker Rule".

The U.S. dollar was overdue for a short-term bounce from a technical standpoint, because more people had become bearish on the U.S. dollar than ever before. The catalysts NIA said have not changed the fundamentals of the U.S. dollar. They have only provided a short-term excuse for traders to take nominal profits on assets they perceive to be riskier, like U.S. stocks and precious metals, in order to buy what they perceive to be a safe haven, U.S. dollars.

Although for the past couple of weeks, investors have been reacting exactly as in late-2008, NIA does not expect to see a repeat of the financial crisis of 2008 with U.S. stocks and precious metals rapidly declining at the same time. There is simply too much excess liquidity in the system for this to happen. The next financial crisis won't be a crisis of a lack of liquidity, but will be a crisis of too much liquidity.

NIA had argued for long that prices of U.S. stocks were overvalued. NIA expects to see precious metals prices decouple from the prices of U.S. stocks in 2010. Gold and silver provide both the safe haven investors sought in late-2008 when they mistakenly bought U.S. dollars, as well as the protection from inflation investors sought in 2009 when they mistakenly bought overvalued stocks.

Inflation will become more evident to everyday Americans in the months ahead as some of those taking profits on U.S. stocks, seek to spend their U.S. dollars on consumer goods and services. When the prices of consumer goods and services begin to rapidly rise, the need to own gold and silver will become very obvious to the general population. It was just announced last week by the Congressional Budget Office that the 2010 budget deficit is expected to reach $1.35 trillion.

A $1.35 trillion budget deficit assumes 2% GDP growth in 2010, which we believe is improbable. This morning it was announced by the White House that they are projecting a $1.56 trillion budget deficit this year, which accounts for a 7% increase in non-defense discretionary spending, not including costs for last year's stimulus package. With the stimulus package included, the increase in non-defense discretionary spending would equal 17%.

During his State of the Union address, Obama promised a three-year discretionary spending freeze in an effort to cut down on future deficits. However, this spending freeze won't begin until 2011 and it excludes defense, education, as well as programs like Social Security, Medicare and Medicaid, which currently make up over $60 trillion in unfunded liabilities. If Obama was serious about cutting down on the budget deficit, he would implement dramatic spending cuts across the entire Federal Budget immediately.

Obama's new budget is projecting the deficit to decline to $1.3 trillion in fiscal year 2011 and then to $700 billion in fiscal years 2013 and 2014. This budget assumes that the economy will recover and tax receipts will rise. Unfortunately, the only reason the economy is showing signs of recovery today, is due to the Federal Reserve's 0% interest rates. [[Plus that multi-multi-trillion dollar stimulus package.: normxxx]]

Interest rates will inevitably rise a lot higher over the next few years, which will put an end to the economic recovery. Combined with the retiring babyboomers, tax receipts are much more likely to decline in the years ahead. Once you take into account the likelihood of rising interest payments on our national debt, NIA believes the U.S. is on a path towards $3 to $4 trillion budget deficits, at the very minimum, in this decade.

Obama's support of the "Volcker Rule", which would ban banks from making speculative investments into hedge funds and private equity funds, is another example of Obama addressing the symptoms of our problems and not the underlying causes. If the government allowed insolvent banks to fail, they wouldn't be able to recklessly speculate in hedge funds and private equity funds. Smaller banks with competent management would've taken over the assets of the failed banks that had incompetent management, and today banks would be competing with each other based on safety and who takes the least risk [[for the best possible potential gain: normxxx]]. By the government adding more regulations to address the problems they caused, they are creating new unforeseen problems that will have to be dealt with in the future, while preventing the free market from efficiently sorting out the mess we are in today, NIA said.