13 May 2010

Bianco on Gold: And Now for Something Completely Different....

Jim Bianco noted on Bloomberg television this afternoon that gold has reached new highs in all major currencies this week, with the most recent high in the Swiss franc, for the first time in over thirty years.

The reason for this is a rush from, or a revulsion towards, paper assets. Gold is now the 'anti-paper' currency, particularly in mainland Asia and Europe.

What is ironic is that I told a friend three weeks ago that if gold went to new highs with the dollar while stocks fell, then he should watch out because it would mark a growing revulsion towards paper assets that would mark a sea-change in the world economy, and the beginning of the end for the dollar reserve currency. A long end perhaps, but the endgame nonetheless.

Investors who rush for safety into the dollar will discover that Bernanke is using their confidence rather badly as he continues to expand the money supply and direct liquidity to support the toxic balance sheets of the banks, including now his own.

The move in precious metals so far has been impressive. It is commonplace, or a truism, to say that 'everyone is long gold' and to short it here because it has moved to a new high.

This is a possible trade. But it could turn out badly if this trend continues, and even moreso, if the faith in the dollar becomes wobbly. As Jesse Livermore once said, 'never short a stock simply because it has gone up. '

If the dollar wobbles we will see a move in the metals that will make what has happened in this bull market so far this year look like a bump on the charts.