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Trading Dollars for Gold & Silver: Implications for U.S. Currency, Markets Yet To Price In Armageddon


What do I have in common with Iran?

Not much I suppose. But we’ve both been trading dollars for gold.

And Iran isn’t the only Middle Eastern nation trading dollars for gold. According to a recent Wikileaks cable, Jordan and Qatar have been loading up as well.

This story has also been verified by Bank of England officials, according to an article in the Financial Times:

“Andrew Bailey, head of banking at the Bank of England, told an American official that the central bank had observed ‘significant moves by Iran to purchase gold,’ according to a U.S. diplomatic cable obtained by WikiLeaks and seen by the Financial Times.”

You might be wondering why Iran has so many dollars, and how it got them.

After all, Iran is a sworn enemy of the United States, and vice-versa. So where did they get these dollars?

The answer is simple. Iran is one of the 12 member states of OPEC. And while the United States actually buys most of its oil from Canada, all oil contracts are settled in dollars.

That’s gotta be a thorn in the side of countries like Iran, and Venezuela. These folks make no bones about hating America.

But I don’t think that trading in dollars for gold is done so purely out of spite.

Look at what happened the preceding five years before Iran allegedly began dumping dollars for gold:

I’d say that more of Iran’s hatred for America probably only comes second to its hatred of watching its currency holdings fall by 25% in a five year span. Who can blame them, or any of the OPEC nations for ditching cash as fast as they can?  The dollar is losing its dominance. You can pull up a chart of the dollar index, like the one above, which compares the dollar to a basket of other currencies. Or you can pull up a chart of gold priced in dollars, or wheat, corn, coal, coffee, oil – almost anything. And the tape tells the tale. The dollar is losing value, and quickly.

The danger isn’t that Iran will keep buying gold. They can do that with Iranian Rials. The danger is that some of the most significant OPEC nations would love nothing more than to stop settling their oil contracts in dollars. They have the motive. All they need is the opportunity.  What’s a better opportunity than civil war throughout the Middle East? What better time to switch OPEC contract settlement to a currency that’s slated to increase in value, like the Chinese Yuan or the Brazilian Real?

Those countries are growing. That’s where real oil consumption growth is going to be in the coming decades.  And with the dollar in free fall, I say it’s only a matter of time before something similar to an OPEC contract shakeup will happen. And then the dollar’s slide will only get worse.

Silver, gold gain on fast-changing global events

Silver and gold prices are climbing as developing crises from Portugal’s financial problems to uprisings in the Middle East are prompting investors to buy more stable assets.

Silver for May delivery rose 2.6 percent Wednesday to settle at $37.198 an ounce. Gold settled up $10.40 at $1,438 an ounce.

Investors are nervous as they monitor fast-changing global events.

In Portugal, lawmakers are poised to vote against more austerity measures for the debt-stressed country. Meanwhile violence in the Middle East and North Africa is raising concern about oil supplies.  The uncertainty of how those events will play out is supporting both precious metals, which have the reputation of being safer assets to hold during turbulent economic times.

Energy prices were mainly higher. Bean and grain prices fell.

Gold Struggles to Build Momentum

Spot Gold (NY Close): $1431.57 // +$3.90 // +0.27%

Commentary: Opposing forces are battling for control over gold price action as sentiment looks for direction. One hand, the US Dollar’s role as a safe haven puts gold on a path parallel stock markets, with bouts of risk aversion sending the greenback higher to produce de-facto downward pressure on the yellow metal. On the other, lingering uncertainty about a host of issues – from the impact of Japan’s Tohoku earthquake on global growth to the crisis in Libya – makes gold attractive for safety-seeking investors looking for a tangible store of value amid the turmoil. On balance, a steady recovery in ETF holdings suggests the path of least resistance leads higher, although a short-term pullback is not out of the question while as the current tug-of-war is resolved.

Technical Outlook: Prices are stalling below falling trend line resistance that has capped the upside throughout March. A bearish Shooting Star candlestick formation hints the path of least resistance leads lower, with initial support lining up at $1412.54. Alternatively, a break above the aforementioned trend line exposes $1444.85.

Crude Oil Hits 2-Week High on Libya

WTI Crude Oil (NY Close): $104.00 // +$1.67 // +1.63%

Commentary: The escalating conflict in Libya continues to pressure crude oil prices higher, with US Admiral Samuel Locklear promising further airstrikes against the forces of embattled leader Muammar Qaddafi in the “coming hours and days”. As we have noted previously, the UN intervention sets an important precedent for future Western involvement in similar scenarios, particularly as protesters face a harsh response in Bahrain. In turn, that uprising is seen by many as a trial run before something similar is attempted in Saudi Arabia – the world’s top oil exporter – and the path for the WTI contractappears to lead higher as long as the possibility that the Kingdom could end up looking like Libya remains alive. The forthcoming reconstruction effort in Japan promises to compound upward pressure from the demand side of the equation as the island nation substitutes traditional energy sources to pick up the slack from its earthquake-damaged nuclear sector. Expectations of a second consecutive drop in weekly DOE inventory figures bolster the case for an upside scenario.

Technical Outlook: Prices have taken out resistance at $104.24 to meet trend line resistance just below the $106.00 figure. A break higher above this juncture exposes the March swing top at $106.95. Alternatively, a drop back below $104.24 exposes trend line support at $102.50.

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