We are coming to an interesting crossroad on the dollar and gold front.  On the daily chart below the dollar is again testing support.  The fact that gold and silver are likely early stages of a breakout quite possibly means that dollar support will not hold here.  

 

 

 

 

 

 

 

 

 

 

 

 

While the longer term trend on the weekly chart (below, right) is downward,  I was suspecting  

that the dollar would recover to the top trend line of the down sloping red channel.  If it cannot do that then it would imply more dollar weakness to come, and possibly even some panic.  Failure to hit the channel rails before changing direction would suggest that sizeable wealth is impatient and is willing to accept a bit less for their dollar than the trend would normally allow.  This generally happens as a result of fear of some sort.  In this case, fear that first Bernanke and then the US government will further ignore the cries of dollar holders to stop taking on more debt and to stop printing up more “shares” of the USA (AKA dollars) which dilute all existing shareholders (dollar holders).  Yes, it’s just like a struggling corporation trying to raise cash by issuing stock.  The lower the stock goes, the more painful it is to the existing shareholders to print up new shares.   The same can be said for dollar printing.

 

In any case, we’ll see very soon.  These kind of transition points do not happen very often in the markets or exist for very long when they do happen.  The herd generally takes a direction and goes with it until it has new data to use in selecting the new direction. 

We could also be at my long predicted point where both the dollar and gold rise at the same time.  As you know, they historically move in opposition to each other.  In my view, the mechanism behind this new and widely unexpected trend would be the de facto, market driven  remonification of gold. 

 

Despite the objections of everyone who thinks a return to some form of gold backed money is impossible, I’m convinced that it is both imperative and inescapable.  I can’t say exactly what form it will take but that is a less important detail.  Many forms are possible.  For example, it could be the result of a full and impartial accounting of the US gold reserves followed by a market based purchasing power valuation of the paper or electronic money.  Alternatively, it could be that the market will demand physical delivery of the gold in a mechanism similar to what the Swiss are thinking about: making coins with small amounts of gold in them (like 1 gram) for use in every day trading.  Personally, I think this a great idea as it will include the physical delivery of gold in every transaction.  Perhaps paper money which includes golden threads of an exact weight could also be part of the scheme. 

 

The key is that it has to be something that the people can believe in.  If this does not happen, they will stop using the funny money and find other ways to trade.  This cannot be allowed to happen or the government will lose its ability to collect taxes.  It will also mean the collapse of fractional reserve banking.  That means no more elitist control or government privilege, boondoggles, military adventurism, bridges to nowhere, propping up of corrupt banks, or ridiculous levels of welfare. 

 

Government does not want to return to honest money but it will eventually happen with or without government support.  Failure to do the will of the people will make current form of government irrelevant.  That the government appears to be in charge of the people has always been an illusion.  It seems true for awhile but only until the people get truly fed up and demand change.  When that happens, governments change either voluntarily or by force.  Period.  History is very clear on that fact.  And no, it's not different this time.