Precious Metals Will Depose Cash from Its Temporary Throne

By: Peter Cooper of Arabian Money.net

“We have just been in Bahrain and everybody is cashed up!” one banker told me today. My reply was that if everybody is now in cash, then it just has to be the wrong place to be. There are some very good reasons to worry about a large cash position.

Quite apart from the contrarian argument that the crowd is always wrong, you have to consider what is happening to the supply of cash. We know that with the sell-offs in global capital markets there is plenty of demand for cash, but what about the supply?

Money supply out of control

Another banker today showed me a chart of US money supply growth over the past few months, and highlighted a 111% increase. This compared with something like 15% money supply growth in the early 1930s as the US authorities grappled with the Great Depression.

There is an absolute tsunami of money coming into the system. What happens when the supply of something exceeds the demand? The price drops. And that is exactly what is going to happen to the US dollar - the authorities are about to inflate away their debt problem.

It is so simple: The debt stays at the same nominal amount, you print more money and the real value of the debt falls. Of course, in the real world that also means a bond market collapse as inflation will make both the coupon and real value fall.

I wonder how long it will be until cash is deposed as king of the investment world? My guess is that it will not be long after the sell-off ends. How long will that take? It could be at the end of the year as the hedge funds attempt to square their positions, or it might be next spring after another lurch downwards in stock prices.

The bottom for stocks will be the top for cash and treasury bonds. Then inflation will start to emerge and depose cash from its temporary throne. Who will be the new king?

Gold and silver

Step forward precious metals to take a bow. Everybody knows that gold is inversely correlated to the US dollar and that silver is leveraged against the gold price. But why have precious metals taken so long to claim their crown in this financial meltdown?

The straight answer is that hedge funds have been selling assets across the board and turning gold into dollars, or at least the paper gold of futures contracts into greenbacks. The physical demand for gold and silver has been growing strongly all the time, hence the silver coin shortage and the $3.5 billion Saudi gold purchase.

Once the hedge funds stop selling (you always do eventually run out of assets to sell), then gold and silver prices will rally, and the rush out of cash and into precious metals will do something pretty spectacular to the price. Gold and silver stocks, languishing at a 40-year low, should jump and deliver phenomenal performance for new investors and repay the patience of long-term holders.

My comment

I don’t think we are at the end of the great asset selloff yet. In fact we may see a huge tax loss selloff next month. I like most others have never seen anything like this as only the great Depression compares. In addition to gold and silver I will also be buying oil and base metals. And let’s not forget the US dollar is going to die big-time.

Currency Exchange Trading: A No Walk in the Park

During the early times, trading is by far the main weapon of any territory just to inject life in terms of economy. Trading on those times is popularly known as ‘barter trade’ wherein both parties are exchanging their goods to the extent that trading routes are being opened to the new world. Historically, trade was justified to explore new lands and discovering new goods.

Centuries have gone and past, and we all know that trade became a major lifeline for a country to survive. By exchanging goods, a host and foreign country are being introduced to new and abundant supplies. More importantly, by trading their products in the long run it also creates harmony and friendship to both nations.

Currently, trade had evolved to a big and complex system. Trade as of now does not only relate to goods but for the new kind of buying power the whole world knows - cash or money. Money also has evolved back from ancient times. Coins, to be exact were introduced by emperors for the people to use and honor. But since the world continues to grow, the terms of money is entirely a different matter now. Even the different currencies are being traded with one another.

Currency exchange today is called Forex or Foreign Exchange. This kind of trading involves the buying and the selling of a currency for another in an agreed determined price. Different parties from various countries are participating in this system that contributes definitely to the biggest financial market of the world. With an estimated 1.5 trillion US$ traded for each day and lots of traders coming from around the globe, Foreign currency exchange trading continues all day, all night every year just to accommodate possible traders from different nations with different time zones.

Currency exchange trading is usually unregulated. Even as some counties enforce a structure of control through central banks, there will be no organizations that can govern the whole market. The central banks will only enforce to control in a way it can draft financial policies to protect the country itself from big losses in the trade. Different governments are participating in currency exchange trading just to manipulate their own money′s value. This can only just be accounted to make a form of regulation since governments take part in the trade fairly exactly the way banks do.

In taking a chance in currency exchange trading, many individuals are still saying that Forex can be risky, too risky perhaps. Take note that in dealing with a considerable amount of money, you must expect that a kind of trade will not go to as planned and you should be ready for it. In minimizing risks, there are lots of trading tools that might help you in trading successfully as well as minimizing losses. Truthfully, all kinds of currency trading are vulnerable to political events, sudden change of rates, and the market changes. The following are some of currency exchange risks:

1 Exchange rate risk- This is a kind of fluctuation in currency prices throughout the trade. Prices unexpectedly fall that leads to financial losses. You can use stop loss orders to help lessen this kind of risk.
2 Risk in interest rates- This risk can produce to differences in interest rates implicated in currency trade by two countries.
3 Credit risk- There is a chance that one of the parties involved will not recognize the debt when the currency trading is closed.

For you to take part in currency exchange trading, always remember that it can be tricky. You must take significant amount of time for experience and research just to become successful.