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TFC Commodity Trading Forum

The Bullion Report For February 29, 2012 *PIC*

For precious metal investors it is appealing to see gold and silver prices soaring to new highs for the year. Crude oil prices are also high, as are a number of other commodity markets. These price moves have captured the attention of the news media, along with the record high cost of gas that Americans are paying at the pump. Is it really that all these prices have gone up so much or is it that your dollars that are worth less? (Let’s hope it's a while longer before anyone is tempted to make a compound word from the last two.)

It may be a simple truth for some investors - the US dollar is not what it used to be. Seldom do investors see news stories pointing to the weakened dollar as the cause of these high prices in so many markets. However, it might work to explain a lot - as the dollar’s value gets diluted, things cost more.

Most of the media maintains an active interest in associating the increased tensions in the Middle East and strong global competition for energy products with these high market prices. Sure, there are many things stirring the global pot, but it does not always lead to higher prices. News is often already priced into markets, leaving little incentive to push them any higher. For so many separate and diverse markets to be at, or near their highs simultaneously leads me to believe there must be a common thread at work. That thread is likely a much weakened dollar. While I see this weakness in the dollar as being a key driver of values, I do not intend to come off as some kind of “chicken little” suggesting that the “sky is falling” either. The economy is not falling apart. It is just reacting, as it should, to the influences of long-term monetary policy efforts put in place.

From my perspective, the across the board increases traders have witnessed cannot solely be attributed to any single thing. However, the major reason gold, silver, oil, and gas are so high is that the real value and buying power of the US dollar has changed. The forces behind a devaluation of buying power have been at work for some time now, a primary reason why many investors have pointed to precious metals as a good store of value. It is my belief that they are seeing that function performed and validated.

The situation that has developed should come as no surprise. It is obvious that the Federal Reserve has made it their focus to provide liquidity to the system, using such methods as forcibly maintaining artificially low interest rates and employing "quantitative easing." Although the initial reaction to this and other stimuli have been positivity for equities, in the long run they have served to undercut confidence in the dollar. The result is the now obvious devalued buying power of the US dollar.

Some may argue that monetary policy such as this is not confined solely to the United States, putting currencies on equal footing where debasement is concerned. Globally, several central banks have taken a similar active stance. They too have resorted to an easy monetary policy. The trick to this current situation is that these commodities are priced in US dollars, so that weakness is reflected in the price value of the commodities. It is the outcome of creating “fiat dollars,” the impact of which is currently the biggest driver in the marketplace.

Will the devaluation of the dollar continue? Certainly the country has had unspectacular economic growth, although several key economic indicators have been impressive as of late. Yet regular concerns regarding employment and a stronger rate of growth continue. The housing market remains in a lull, although stronger verbiage might be exploited here. The caveat to positivity in recent reports is that they are an improvement on a very bad set of years, coming off decade lows in some cases. The Fed has recently reiterated their commitment to maintaining low interest rates. If that is not a reason to kick the economy into higher gear, it is not out of the question for more quantitative easing to appear, further diluting the dollar.


The gold standard was abandoned because it was not capable of providing the type of flexibility thought necessary in the global marketplace. That gold is immovable, or at least capable of serving as some kind of financial sentinel in tough economic times, may help support higher prices. The weaker US dollar and weakened currencies across the globe are spurring interest in commodity investment, which helped many markets break to fresh highs. The dilution of the dollar is going to be difficult to reverse - the Fed cannot take back money that was printed or stimulus that was given without affecting the whole system. This can only serve to benefit precious metals for now and the foreseeable future.

Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.