Egypt And Gold vs. Fed And The Dollar

By: Elizabeth Kraus

It is being reported by the International Monetary Fund that Gaddafi has amassed one of the largest gold positions in the world. Libya’s gold reserves are estimated to be worth over $6 billion, and the gold can be used to buy paid fighters. At a time when international sanctions have been increased, gold has been Gaddafi’s store of wealth; he appears to have been ready for this day because Libya’s holdings are much larger when compared to countries with similar demographics. Egypt (Market Vectors Egypt Index ETF (EGPT) tried to reopen their markets but had to shut them immediately as investors are liquidating Middle Eastern assets (SPDR S&P Emerging Middle East & Africa (GAF) for the safe haven of gold (ProShares Ultra Gold (UGL) and silver (ProShares Ultra Silver (AGQ). Egypt’s shares have tumbled to new lows, while silver is exploding and gold is just ready to make its next move into record-high territory. Middle East crisis fears should put pressure on fiat currencies as investors flee to the safe havens of gold and silver which are regarded as an alternative form of authentic value. And, while European leaders try to resolve the debt crisis and all eyes are on Portugal, whose government is in danger of collapsing and is in need of a bailout, watch for a move out of the euro to support precious metals prices as the euro reaches its descending upper resistance level. For the past two years, the euro and the dollar have done this inverted dance wherein one goes up and the other goes down. But one thing is fact; they are both in secular long-term downtrends. The dollar may have risen against major currencies Tuesday, after a U.S. Federal Reserve official said “policy makers may not be able to wait for the resolution of global crises to begin withdrawing their ultra-accommodative monetary policy,” and another credit downgrade of Portugal and Greece highlighted those crises, but what the average person doesn’t know, there is absolutely nothing “Federal” about the Federal Reserve System, and neither does it have any “Reserves” to play up the dollar. With what?

When the US government needs money they simply print worthless pieces of paper called bonds and sell them to the Fed for more worthless pieces of paper called Federal Reserve Notes. Unfortunately for you, Mr. Citizen, those bonds represent a debt owed to the Fed by the US taxpayer. When the bonds mature, naturally the government won’t have the money to pay the Fed, so they’ll issue even more worthless bonds to get more worthless Federal Reserve Notes needed to pay off the first set of worthless bonds. Rinse and repeat as required. Do we see the picture? So, what’s the point to up the dollar, short the dollar, buy the dollar, hold the dollar, etc., it doesn’t matter. Banks go to the Fed when they run out of money and to the Government when they lose it–playing with house money when you own both the printing press and the United States Congress—is okay—but the Fed built house of cards will tumble when they can’t fleece the public anymore. Meanwhile those who own precious metals will have their solid asset as a safe heaven that will prove its value time again.

In late January “buying” signal in precious metals was easier to pinpoint with gold (SPDR Gold Shares (GLD) as the two-year uptrend stayed intact and provided a low-risk high-reward buy point. Over the past two years since the credit crisis, we have highlighted the precious metals sector, especially gold and silver (iShares Silver Trust (SLV), as we believed governments would do everything possible to prevent deflation. This has come true, as quantitative easing and the printing of dollars has caused a major run into hard assets and key commodities as investors have sought safety from fiat currency risk and soaring deficits. One must trust this trend in precious metals and not be shaken off by useless Fed comment, unless there are signs of a parabolic top. These markets will not end until moves become erratic and panic-driven. I have not seen that yet in the gold market. Although the silver market since the fourth quarter of 2010 has been outperforming gold and moving parabolically, it is catching up as it underperformed for the first half of 2010 and 2009.

According to Regal Assets top analyst other factor that will play into gold is the Libyan tensions, the violence in Syria as protestors are being fired on, and the Yemen’s government in danger of collapsing. Also, all eyes are still on Bahrain. The Shiite versus Sunni friction is increasing between Iran and Saudi Arabia over the control of the Strait of Hormuz. Bahrain is one of the major US allies in the Middle East and is mostly Shiite, but is currently controlled by Sunni Muslim King Hamad bin Isa Al Khalifa. Many of the dissidents believe that Bahrain should be part of Iran, and Iran still claims that land as their own. The Sunni King has already foiled a coup. The Saudis are growing nervous as a loss of Bahrain would spell disaster for an imminent uprising in Saudi Arabia, causing an oil spike never seen before.

All the while, as the dollar rose against major currencies Tuesday after a U.S. Federal Reserve “policy makers” begin withdrawing their ultra-accommodative monetary policy, “precious metals facing investors had remained net buyers of gold for its safe haven and portfolio diversification qualities, using it as a hedge against inflation and currency market volatility,” CPM Group said. In recent years, other investment avenues emerged, which also contributed to the overall rise in investment demand, said the New-York commodities research firm: “Now we can expect a significant turn after a short correction as gold and silver will consolidate again to new highs following traders continued take on profits at record highs.” Investors in the past have added 33.8 million ounces of gold to their holdings in 2010, up 23.7% from 27.3 million ounces added in 2009, according to CPM Group’s Gold Yearbook 2011, released Tuesday.

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