Gold and silver sell off on the world's inability to forecast inflation, ASX futures down 42 points

Looking at the chart of US dollar gold over the last 10 years tells a story of broken theories and new paradigms. Between late 2008 and 2011, it was clear to the world's gang of precious metal traders that the US was playing with fire, by allowing its central bank to magically expand its balance sheet and buy vast amounts of government debt. You don't need to be an economist to know that when a team of government-appointed Fed officials agrees to buy trillions of dollars worth of government bonds and mortgage-backed securities with money that doesn't already exist in the system, the integrity of the US dollar comes into question. By the end of all of its quantitative easing programs, the US Fed owned around US$3.5 trillion more in government and government agency debt than it did before the GFC, now totalling around US$4.2 trillion. Could you imagine what might happen to the Australian dollar and the economy if our government started paying its bills with fake money magically facilitated by the RBA?

Well that all sounds sufficiently horrifying, and as such gold traders went on a buying bonanza and drove its price from around US$750 in 2008 to almost US$2,000 in 2011. The premise of this being twofold: first, unlike the US dollar, gold is both a currency and an element that cannot be reproduced, and therefore it has inherent qualities that retain its integrity; second, with all of this 'money printing' going on, surely the purchasing power of the US dollar would fall and the US would experience huge levels of inflation, no??? It was a sound theory, but somehow it just hasn't panned out that way.

So here we sit now, mystified, that the US dollar is trading higher than it was before, during or throughout the six years after the GFC, and official US inflation figures now state that the prices of goods and services have risen only 0.5% year on year to November, 2015. As Alanis Morissette would say, it's a little too ironic. But it is what it is, and the strength of 'brand USA' has pulled this country through an almost-unbelievable period of economic experimentation, and the more years that pass since the GFC, the more permanent this new paradigm of a sound US economy built partly on pretend money becomes.

You can see in the first chart the hopes and dreams of gold and silver traders fading from 2011 until now. ("Surely it can't be?! Surely they can't get away with this?!") Well maybe they can, and even if one day the US dollar loses grip of this fairytale, will anyone have been able to stick with the trade long enough to come out the other end smiling? After enjoying a rally on the back of the Federal Reserve's rate decision yesterday morning, gold and silver fell last night by around 2.5% and 3.8% respectively. Until this price behaviour proves us wrong, it seems that the world has forgiven the US economy for creating the GFC and then patching itself up in such a spurious manner, and precious metals have missed out on being the deserving beneficiaries of this bizarre period.

In other news, Europe had its chance to party on the back of the previous night on Wall Street, with Germany's DAX closing up 2.57%, but US traders decided to take profits and send the S&P 500 1.5% lower. The US dollar index has strengthened to 99.19 points as I write, which has pushed the Aussie dollar down to US$71.23.

Source: Rivkin, Saxo Bank

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This article was written by Scott Schuberg, CEO of Rivkin Securities Pty Ltd. Enquiries can be made via or by phoning +612 8302 3600.

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