December 11, 2009

The Last Real American Dollar

by Bill Downey

Every now and then there are extraordinary events that occur that end up shaping the
world for many years to come. The Lincoln and JFK assassinations come to mind. More
recently, 39 years ago (Dec 8 1980), John Lennon was gunned down in front of his own
house. In many ways, the generation that grew up with him, grew up that night. As he
eloquently put in his post Beatles album, "The Dream is Over." For that generation it
was.

And what of JFK?

That day in Dallas was in many ways where the changing of the guard that Kennedy
inherited was circumvented. Indeed, one can only ponder had the "old guard" not
regained control of the throne what the potential for this day and age might have been.

Now a lot has been written about JFK, good and bad, true and false, and the realm of
conspiracy has been pondered by most that have done any study of the events. But that
is not what this is about.

This is about the last REAL AMERICAN MONEY.

When one looks at real money, gold coins per se, it is hard not to notice the references
to freedom and liberty. That is because "REAL MONEY" is freedom.............and liberty. It
always has been, and it always will be. The truth be known, the modern route to slavery
is through DEBT.

Take a good look at this five dollar bill above. There is one thing that is different than
any other bill you have seen in circulation. That difference when viewed in the lens of
today has profound implications. Can you spot what the difference is? (It is not the red
seal) Take a few moments before your read the answer below. Take a good look. What
is different and what is the implication?

What many people don't know about JFK is that he was the last American President to
print money that was NOT backed by the Federal Reserve. Let me repeat the last portion
of the sentence. ..........MONEY THAT WAS NOT BACKED OR PRINTED BY THE FEDERAL
RESERVE!!!

What you are looking at is a "UNITED STATES NOTE" - So ordered by John F Kennedy,
president of the United States. Look at the very top of the front of the bill, at the very
top middle. See how it says "UNITED STATES NOTE" instead of "FEDERAL RESERVE
NOTE"?

Constitutionally, JFK had this money printed. Only Government has the legal authority to
coin legal tender money.

The ramifications are too much for me to contemplate, but the bottom line is that JFK
was issuing money (REMEMBER THE 2 DOLLAR SILVER CERTIFICATE BILL) that was
either backed up by silver or in this case above, was not "BORROWED" from the Federal
Reserve. Now if the Feds had gold to back up all that they would print it would be a
different story. But they do not.

It is often said that if you want to get on the trail of the truth in history, follow the
money. While we will never know the entire details of the JFK assassination, I find it
interesting that these bills were QUICKLY CANCELLED after his assassination and not
issued? Why?

One way or another, the Federal Reserve, the ones who are up to their necks in sharing
the responsibility for the current collapse of the USA, regained "control" of the money
supply with the death of JFK. That is a very big historical convenience wouldn't you say?

When push came to shove in 1971, Richard Nixon closed the gold window forever. This
became the point of LIFT OFF (INFLATION) FOR THE ENTIRE GLOBAL ECONOMY we
know of today. In fact, the first place Nixon headed after the gold window closed was to
CHINA................TO OPEN THE DOOR OF TRADE. It really was about minimizing
inflation by transferring the manufacture of US goods at an extremely low labor cost
point of manufacture. The rest is history. The USA's manufacturing base (the production
of things) was basically transferred to China.

Let's look at the change since then and see how gold has reacted.
From August 1971 to January 1980 Gold moved from $42.50 per ounce to $875 -- 102
months (EST)
From April 2001 to January 2009 Gold moved from $255 per ounce to $1227 -- 104
months (EST)
Does history repeat? Has it already repeated?
The gold chart above is suggestive that we have arrived at a very important point on the
price chart. The convergence of these channel lines suggest that the 1200-1400 area is
the point where we have either reached a major high in gold and a good pullback is
about to occur, or it is the point where a total melt up could develop from a gold perfect
storm environment of currency collapse, war, and an inflationary spiral due to mass
currency printing that engulfs the entire world?

OR.................as the few (very few) lone voices tell us..............all this will not inflate
things, it will deflate things. To which all of us laugh. (But a few of us ponder).

A long term perspective to ponder................

US Dollar index December 1979 = 85 US Dollar index December 2009 = 76

There are a couple of ways of looking at the dollar and what it might mean.

The dollar has only dropped 9 points since 1979 or about 10% (see red arrows on
chart). In thirty years, the dollar is only marginally lower. That is an incredible statistic.
And what about 1980, what happened there. Interest rates were raised to 21%. That
was some dollar rally.

What else might we postulate?

That the real drop from all this printing has not even begun in the US Dollar?

The problem with looking at the dollar index is that it is measured against all other
currencies. The dollar's 10% drop is because for the most part, the rest of the world is
keeping up with USA's printing press. At least over the long run. But as we can see in
1980, who on this planet at the time that gold was 875 was forecasting that the US
Dollar would climb from 85 to 165? Not many. A few? Sure.

This is where we see the difference in the long term as gold investors. How can we value
gold?

"How much things cost on Aug 15th, 1971" to what they cost at $900 dollar
gold"

Dow Jones Industrial Average 890 or 25 oz. gold in 1971, versus 10,000 or 11
oz. gold today.
Average Cost of new house $25,250 or 721 oz. gold in 1971, versus 250,000 or 277 oz.
gold today.
Average Income per year $10,600 or 302 oz. gold in 1971, versus $70,000 or
77 oz. gold today.
Average Monthly Rent $150 or 4.3 oz. of gold in 1971, versus $824 or .8 oz. of gold
today.
Datsun 1200 Sports Coupe $1,866 or 53 oz. gold in 1971, versus $28,400 or 31 oz. gold
today.

As we can see the difference is in purchasing power. We can buy a lot more for
our gold today. The above example shows for the most part, we can buy things
at about 1/2 the price of 40 years ago. Some things on the list are 1/4 the cost.

Now the 64,000 dollar question. Based on purchasing power...............

Is gold overpriced, underpriced, or just right? Perspective is everything.

One of the things we can be certain of is gold is in some way a "panic" or loss of faith
instrument. It is certainly an "emotional" investment. In this current case, a loss of faith
in the system of fiat currency and the debt that has ensnarled the globe is the main
driver for gold. The assumption is that all of the financial incidents that are transpiring
are INFLATIONARY down the road. We must admit, it is a UNIVERSAL opinion and the
history of the dollar debasement is a hard argument to debate. Still, I always get uneasy
when I am in a situation in the investment world that is universal.........if you know what
I mean?

The history of the USA and precious metals is a study in itself, and it's not the first time
that the government has fiddled with the "golden violin." Ever since the abandon of gold
and the US Dollar float, an incredible and highly leveraged and complex global world
economy has developed. It is a development that has been building up over the past
forty years and from a long term perspective has reached a point where the leverage
itself has become the single biggest danger to the growth and sustainability of economic
development. To fathom there's 600 trillion dollars worth of derivatives out there is a
testament to the height of this leveraged insanity. And that in essence is the
problem.............."Leveraged debt." New debt is backed by.............old debt. It must
because debt is the only instrument we have for backing.

During the 2008 meltdown, the real estate default was a major contributing factor. Now
we hear nothing about it in media, we just see the for sale signs as we drive our cars.
The commercial real estate market is nearing the point of "RESET" -- commercial loans
have a much shorter maturity, and the default rate of mortgages themselves continues
to grow at a faster rate.

The next set of "MEDIA" event has been set off by the Dubai Default, and the news has
quickly come to the forefront of the gold market. Six banks were quietly closed in the
USA last week. The FDIC IS BROKE.

Just a few weeks ago, Japan printed some 10 trillion yen in order to provide another
stimulus to an economy that is in the government's words..........still in deflation. This
has been going on now for twenty years in this market. Greece and now Spain are being
mentioned in the media as credit risks. We're going from consumer bust, to institutional
bust, and now we are nearing NATIONAL BUST.

In an interesting twist, behind this cloud of toxic debt has been the accumulation of gold
by China, India and a host of other nations. And the internet stories continue to grow.
The mint is reporting a shortage of coins, and there have been stories about tungsten
found in 400 ounce gold bars. The most interesting reports out there are stories in which
the major shorts in the market are offering cash premiums to settle delivery contracts.
Coupled with the price action of gold, it is difficult not to surmise a continued bull market
in the metals. Don't all of these things indicate SUPPLY SHORTAGE DEAD AHEAD?

Throughout the year, I have postulated that as long as the debt melt down situation of
2008 does not return, that the metals should continue moving higher. This observation
is based solely on what transpired in the markets of 2008 and there is always the
potential that this time could be different.........but that is usually not the long term case
in commodities. In 2008 the real selloff was not the FIRST default news, but the
SECOND and THIRD. Is there a second story on the horizon?

I do not portend to consider that I fully comprehend the machinations and complexities
of the fundamental aspects of what is transpiring around the globe. I use it as a
backdrop in trying to understand the aspects of what it does to market prices.

During the last market melt-down the US Dollar was a benefactor. The chart clearly
shows a rally of significance developed in July 2008 and the peak price in 2009 was right
at the stock market bottom. Since that time, the US Dollar has been in a massive
downtrend channel. Recently a very important point was touched on the US Dollar. A
channel support line drawn off the last lows of 2008. This chart was included in our
weekly update, and provided a break point of 74.00-74.25 for the US dollar. Since that
low, we can see two things of importance. First that the area of support held, and since
that time price has made its first attempt to break out of the downtrend channel. Price is
now at a key MOVING AVERAGE on the chart for the first time in a year.
The 76.50-78.00 area is an important area for the US Dollar. If all they say about the
carry trade is true, then the crowd that is in the US dollar is going to have to be very
careful. If the players all start heading for the exit door at the same time, the dollar
could become a local favorite for a short while here.
So far, it's only a lift and while the move is coming form a key area, it is only the first
move that the dollar has been able to muster in a month.

Should additional "DEFAULT EVENTS" begin to surface however, the potential for the
dollar to rally into mid January becomes very real? Even on momentum alone, a further
rise could set off a wave of buy stops. Those short the dollar should remain very
cautious.

Initial resistance would be the 78-80 area on a weekly basis. Even that type of rally
would provide a window to see if all other markets will go in the other
direction.....DOWN.

IF THEY DO --- THEN THE SYSTEM REMAINS BROKEN AND FURTHER TROUBLE LIES
AHEAD.

In other words, if the financial world has come down the point that everything runs
counter to the dollar -------------no matter what the instrument and fundamental is,
then the investment world will remain a dangerous area prone to huge swings one way
and then another without any fundamental consideration. It will all be dollar driven, and
that is not a good thing.

Investors need to be thinking in three timeframes. Short, medium, and long term.

Over the short term, the potential for a dollar rally is one that we have been on the
watch now for a few weeks, and we have either just witness our usual BLIP EVERY 2-3
weeks or so and price is about to turn right back down. However, should we move above
the blue moving average on the chart, a potential rally to mid January could be in the
cards?

Over the medium term, the potential for a dollar rally we feel lies with the current low
we just saw at the 74 area. Should the US Dollar not rally from this
point...................and turn back down from here and close below the 74 area............I
would anticipate a rather large drop to below the 70 area. In that event, the odds that
gold would exceed the 1300-1400 area would be great.

It will be important to watch the US dollar over the coming month. As long as it remains
above the channel lines on the chart above, the potential for a rally will remain in play.
The EURO also gave a confirming sell signal over the short and potentially the
intermediate term.

We anticipate that the month of December will be a month of consolidation. Odds favor
a pullback/consolidation to the potential area of 1070-1095 and/or the Monthly support
of 980-1030 would be targets.

In sum, odds favor a range bound month in December.

For now, the medium and long term trends of gold remain intact. We have a suspicion
that one way or another, the 1250-1300 area is going to be a major point on the chart.
Should gold exceed that area, we would think a move higher would be in the cards. Until
that time, we have to keep our mind open to change and to go with the price flows.

At www.Goldtrends.net , we follow all the timeframes of the gold market right down to
the hourly trend. We are currently monitoring and watching the pullback in gold. If you'd
like to follow along with us then drop by the website (where registration is not yet
required) and check out ALL of the gold and silver analysis provided there for your
review.

May you all prosper in the coming month,

Bill

Bill Downey
http://www.goldtrends.net/

Bill Downey is an independent investor/ trader involved with the study of the Gold and Silver markets since
the mid 1980s. He writes articles for public distribution for other newsletters and websites as well as his own
site at http://www.goldtrends.net/ where registration or an e-mail address is not required to view our data.

Copyright © 2009 Bill Downey