It’s Five O’clock Somewhere

Pour me somethin’ tall an’ strong,
Make it a “Hurricane” before I go insane.
It’s only half-past twelve but I don’t care.
It’s five o’clock somewhere.

For any of you who have purchased gold or silver and are concerned about the recent price action, I understand.  Essentially every gold article that you now read is claiming the end of the bull market is now here.

With fear abound, I believe it is important to provide a bit of perspective that is key toward understanding the bigger picture.

In case you forgot, the world is facing a serious financial crisis that has not yet resolved itself.  The poison which had caused the last meltdown in 2008 has not gone away, and in many respects has only gotten worse.

We now live in a world in which central banks have to continuously create new money in order to prop up a monetary system that is reaching its denouement.

Whether it’s the BOE, ECB, PBOC, BOJ, or of course our own Fed, the fact is they’re all participating in the race to debase.

While all of these central banks enact policies (aka print money) in order to devalue their respective currency against one another, it is imperative to understand that all such policies only produce short term gains.  As one central bank successfully creates the desired devaluation, the next central bank prepares to counter with its own easing, and then the next, etc., until the process essentially repeats.

What we are basically witnessing is one very dangerous merry-go-round that continues to accelerate.  As it accelerates, more of those that are currently on the ride will find themselves being thrown off and mangled quite badly.  Eventually, when the merry-go-round finally stops, no one will still be on it.  All whom participated shall suffer, and it will take quite a bit of time to make a full “real” recovery for all.

Understanding the role of gold during all of this is crucial for all whom desire protection from the monetary madness that affects all of us.

First and foremost gold is money.  It has been for thousands of years.  Central banks hold it because it is the best form of money (long term) and it is crucial to have during times of monetary crisis, which is what we find ourselves in.

If we are to look at the value of a paper currency, such as the USD, what are we to compare it to in order to understand its true value?  Of course many financial advisors and Keynesian economists will tell you that the dollar index (DXY) is a solid barometer in determining the strength of the USD.

But what is the dollar index?

The dollar index simply shows the value of the USD relative to a basket of foreign currencies including the euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc.

The DXY is a great tool to use in order to understand where the dollar stands amongst its peers.

Recently, the dollar has been rallying quite nicely amongst its peers, and may continue here in the short term.  However, should any of us be impressed with the dollar strengthening against other paper currencies that are being purposely devalued by their central banks?

Looking at the 5 year DXY chart up above we see a fairly distinct, range bound index that goes up and down (round and round the merry-go-round) amongst its peers.  Should we not expect this to continue as the various central banks take their turns opening the spigots?

While paper currencies will continue to fluctuate against one another, there is one constant barometer that provides us with the best insight in regard to the value of currency, gold.

While many of us here in the US are concerned solely with the price of gold relative to dollars, it is vital that we understand gold on a global scale.  This will allow us to have a much greater perspective in understanding the major macro trend.

The following three charts show the gold price in USD, EUR, and JPY over a five year time frame:

What do you see when you evaluate these charts?

The most obvious point to be made is that all three lines are trending upward and to the right.  Meaning all three currencies are losing value compared to gold, money.

The next point to be made is that while each of the three currencies followed essentially the same path up until the 3Q peak in 2011, post 3Q 11′ has been a slightly different story.

In relation to the dollar, gold has fluctuated in a range from as low as $1550 to as high as $1800.  The price of gold in dollars has obviously failed to make a new high since gold peaked in September of 2011 at a price of just over $1900.

In relation to the euro, gold went on to make new highs in October 2012 at a price of around €1380.  If you will remember, this came at a time shortly after the German Constitutional Court ruled in favor of the €500bn European Stability Mechanism (ESM) bailout fund.

In relation to the yen, gold has just made new highs as of earlier this month (February 2013) around ¥156,000.  The new high in gold came about after the new Prime Minister Shinzo Abe announced plans for additional open-ended QE going through 2014.

The point that needs to be made is that gold provides us with the best barometer for the health of a currency.

Though gold may not be making new highs in USD’s right now, it is making highs in one currency or another that is currently being abused “the most.”

Hence, as Jimmy Buffet likes to sing…”It’s five o’clock somewhere.”

The central banks, including the Fed, will continue to print.  Our governments will continue to borrow and spend.  Meanwhile, the purchasing power of our money will erode due to inflation which has yet to truly rear its ugly head.

With that being said, I don’t know how long this correction will last, or how low gold will go.  It may take quite some time, maybe another year or so for this to fully play out.  But I have a feeling that once this bull market starts its next leg upward, it’s going to be pretty dramatic.

Now is not the time to panic and run for the hills.  I rather suggest that you take a deep breath, relax, and get ready for a solid buying opportunity.  Perhaps kick back, put on some Jimmy Buffet and have a cocktail…