For years, analysts said that if the dollar dropped below 79 on the US$ Index it could spiral downward in a precipitous drop. Well, the dollar is trading below 79 and fears of a big dollar decline are starting to spread. And, rightfully so.

The dollar is in serious trouble because of decades of deficit spending and the running up of the national debt. Since Bush took office, the national debt has more than doubled. A declining dollar, of course, would be bullish for the precious metals.

James Turk, longtime monetary analyst, has posted telling graphs for gold, silver, the dollar, and the euro. Gold has broken to the upside out of a consolidation pennant that started in May and is now trading at its highest level since January 21, 1980. Yet gold receives little attention by the media, further evidence that we’re still in the early stages of this precious metals bull market.

Silver has not matched gold’s performance since March. Under performed is the term now widely used to describe silver’s price action. However, Turk notes that silver has broken above the downtrend line going back to the May 2006 top, supporting the position that gold’s uptrend is a significant event.

Turk sees the decline in the dollar as “relentless,” that downside momentum is starting to build, and that a rout could be ahead. He also notes that gold has broken out against the euro, which I consider strong evidence that gold is in a strong bull market.

Meanwhile, silverseek.com has posted a Ted Butler article on gold and silver. Butler is legendary in silver circles for his bullish articles on silver, which are always interesting. This article is especially interesting because he is short-term bearish on gold due to the large commercial traders’ short position in gold.

As he often does, Butler lambasts the bullion banks for their actions in the gold and silver markets. Manipulation is a word Butler often uses. He fears that the COT (commitment of large commercial traders) position in gold portends downside action. When it comes to silver, however, he has another view.

The COT in silver is not nearly as large as it has been in the past, evidence to Butler that the large traders are not as willing to take big short positions in silver as they once were. Still, he sees gold as vulnerable in the short run.

I don’t know what gold and silver will do in the short run, but in the long run I see them going higher, much higher. Before you jump of off gold because of Butler’s analysis, remember that when gold tacked on $300 from the fall of 2005 to May 2006, the large commercial traders held huge short positions in gold and suffered horrendous losses. During the same time, silver doubled in price from $7 to $14, and the bullion houses were short millions of ounces of silver, taking big losses there.

I suspect that the big bullion houses will suffer similar losses before this bull market is over because they continue to play the short side of the market, but this time? We’ll just have to wait and see.

Eight reasons for being bullish on gold

At the recent Denver Gold Forum, Dr. Martin Murenbeeld, chief economist of the Dundee Group of Companies, gave eight reasons for being bullish on gold. The first three had to do with the dollar.

The first is because monetary reflation is happening due to the liquidity crisis.

The second is the U.S. dollar’s continued devaluation.

The third reason is the excessive of U.S. dollar reserves in Asia. “Asia holds more than $3 trillion in exchange reserves but ‘next to nothing’ in gold reserves. If the nations would want out of those exchange reserves, ‘hopefully they turn to gold.’”

I have no idea why Murenbeeld said “hopefully.” Gold has been standard monetary reserve since paper currencies were developed. If the Asians want to turn their dollars into hard assets, gold is the logical choice. For those who think that the euro is the dollar’s replacement, remember the euro is only another paper currency, which can be created at will just like the dollar.

Having concluded the sale of 150 tons of gold this year under the Central Bank Gold Agreement (CBGA), the Bank of Spain (Spain’s central bank) announced that it “plans no more significant gold sales in 2007.” Spain has been the big seller under the CBGA this year, selling 150 tons in calendar 2007 but 165 tons during the CBGA year that runs October 1, 2006 through September 30, 2007. The CBGA limits the European central bank signatories to 500 tons a year; however, with the CBGA year ending this month, it looks like only 400 tons will be sold under the CBGA this year.

The Bank of Spain has sold 239 tons since it began its sales campaign, having reduced gold holdings by 46% in volume terms. Unlike the Bank of England, which sold at the 2000 and 2001 market lows, Spain’s central bank sold into a rising market. Undoubtedly, the central bank’s sales were, at times, caused some of gold big drops in 2007. But now, the Bank of Spain says it has concluded its gold sales for 2007.

Another possible new big seller is the Bank of Italy. The Italian Parliament has discussed possible gold sales to reduce Italy’s massive public debt. However, according the Philip Klapwijik of Gold Fields Minerals Services, the sale of any Bank of Italy gold remains the central bank’s call.

GFMS expects next year’s CBGA sales to be closer to 400 tons than the 500-ton maximum. However, Klapwijik leaves himself an out with that prediction, noting that there remains the possibility that Italy will sell and maybe Germany. Further, France and Switzerland could accelerate their sales in 2008 beyond what they have announced.

If these central banks push their gold sales to the 500-ton limit, it will probably happen only if the gold market is favorable, meaning rising prices. Resourceinvestor.com has a good article on central bank gold sales.

The Fed’s rate reduction and reactions

In a move right out of a Keynesian textbook, Tuesday the Fed cut interests and the celebrations began. Stocks and precious metals registered big gains immediately on the Fed’s announcement that it had cut its target for the fed funds rate from 5.25% to 4.75%. The fed funds rate is the rate at which banks lend money overnight among themselves.

The Fed attempts to manage the rate by supplying or contracting liquidity via the buying and the selling of treasury bills and repurchase agreements in what it calls its open market operations. The Fed also cut its discount rate fifty basis points. The discount rate is the rate at which the Fed lends directly to banks.

The Dow Jones Industrials posted their biggest gains in five years, climbing roughly 336 points for a 2.5% increase. It was the biggest one-day point gain since Oct. 15, 2002, when the Dow added 378.28 points. On a percentage basis, the Dow added 2.5%, its best one-day gain since April 2, 2003, when it gained 2.67%.

Stock investors clearly saw the Fed as a White Knight charging into the financial markets. Over in the metals markets, the Fed was seen as a Black Knight, delivering freshly printed fiat currency.

Gold prices surged to a 27-year high because the Fed’s actions were clearly viewed as inflationary. However, silver prices lagged. While gold topped its high of May 2006, silver is still trading $2 below its May 2006 high. When gold and silver disconnect that much, silver becomes the better buy because it eventually catches up, sometimes rapidly, sometimes over an extended period. I expect silver to more than catch up and wholly endorse silver as the better investment at this time.

Over in the oil pits, the Fed’s move was also seen as inflationary. Oil prices closed at a record high for a second session.

Not curiously, the dollar held about 79 on the US$ Index. I think the world’s central banks were prepared. The question now is how long they will stand in the breech as private parties unload dollars.

On a further note, silver bull Ted Butler is back in the news, maintaining that the price of silver is being manipulated. If so, perhaps, that’s the reason for silver lagging gold.

With gold making a strong move above $700, there is not shortage of articles about it.

Thursday, mineweb.com posted three articles after the release of GFMS’ first update of it 2007 Gold Survey. Gold could rally through $800/ounce notes GFMS’ chief analyst Paul Walker’s bullish outlook on gold. “. . . a gold price over $800/ounce was on the cards if the US sub-prime credit crisis diminished people’s confidence in the US dollar and other investment asset classes.”

Gold reasserting itself as safe haven is a longer article and discusses GFMS’ views on the gold market. Admitting that gold has performed better than earlier thought, GFMS Chairman Phillip Klapwijk now says that “there should be little problem in sustaining prices above” $700.

Also optimistic is Gold - are we at the start of a new bull market? Again calling on statistics from the GFMS update, the writer pens “The study concludes that the first half of the year saw gold experience over 200 tonnes of net disinvestment, driven by large-scale speculative offloading, but that we are now experiencing a sea change and that there will be a significant upswing in investor purchases over the rest of the year.”

Over at resourceinvestor.com, they, too, recently posted bullish articles on gold. Bullion Bull Run: Gold’s Rally Expected to Continue to 2008 summarizes their thoughts on the GFMS’ update. A lengthy article, it covers de-hedging and mine production in developing its bullion position.

Not using the GFMS’ update, Why the Bullion Market Is Surging Ahead lays out a broader view of the gold market, with comments on the liquidity crunch resulting from the subprime mess and speculation about the Fed’s next move. “Investors are betting the U.S. Federal Reserve will cut its main interest rate by up to 50 basis points, to cushion the U.S. economy against the credit squeeze.” Personally, I suspect the cut may be only a quarter of a point with a strong statement as to how the Fed is prepared to do what is necessary to provide for an order financial market, or some statement to that effect.

Meanwhile, I’m working on an article titled Why own gold, which will be emailed to our Articles of Interest subscribers in a few days. This piece will be “time less” and deal with just what the title suggests: Why own gold.

A man with whom we have not done business called early this morning. He said he found us on the Internet, doing a search because a dealer from whom he bought coins last year would not return his calls. His story is sad and similar to other stores we often hear.

He said that in early 2006 he responded to an ad in USA Today by a firm in Texas offering sets of the US Mint’s Gold Eagle coins. A Gold Eagle “set” contains one each of the four sizes of Gold Eagles: the 1-oz, the ½-oz, the ¼-oz and 1/10-oz gold coins, totaling 1.85 ounces. Gold Eagles are basic gold bullion coins that can be bought from any bullion dealer or coin shop in the country at a few dollars over the value of their gold content.

To increase supposed value, the sellers had submitted the Gold Eagles to one of the two major grading services, PCGS or NGC, where they are “slabbed,” which is an industry term that means the coins have been graded and inserted in hard protective cases. Grading is appropriate for old US gold coins, such as $20 Liberty Heads and St. Gaudens, because many of those coins (most of them in the case of the Liberty Heads) have been used as money and have suffered wear. New slabbed Gold Eagles are usually promoted as First Strike or Early Release coins. (Follow this link for an article on First Strike coins, which NGC now calls Early Release coins.)

The grading services provide a valuable service to the coin collecting industry when they grade old coins; however, grading new US Gold Eagles is superfluous because all new Gold Eagles are either MS69 or MS70, the two highest grades. Still, promoters submit new coins to grading services because of the supposed increased value that comes with the coins being slabbed.

In reality, there is no value to slabbing new coins. When we buy Gold Eagle coins in the secondary market from wholesalers, the coins normally come in tubes as shipped from the US Mint. More often, though, we are receiving slabbed MS69 and MS70 Gold Eagles, which means that slabbed Gold Eagles are carrying no premiums in the secondary market.

Back to the man who bought from the Texas promoter.

Unfortunately, the man did not pay a few dollars over spot for the slabbed Gold Eagle sets he was sold, which would have been about $750/oz or $1387.50 a set if valued at normal Gold Eagle prices. He paid $3150 a set. He also was sold proof Gold Sets at still higher prices. “Hate to tell you what I paid for those,” he said.

The buyer could not get the seller to return his calls when he needed to sell. He went to the Internet and found us, and we became the bearer of the bad news. Sadly, this man’s have become commonplace of the last few years.

The practice of slabbing new US Gold Eagles has been called into question legally. Late last year, one lawsuit alleged that “tens of thousands of people have been duped” into buying First Strike coins. The suit named PCGS and NGC, but NGC has settled. A Google search produced no evidence that PCGS has yet settled, so the case may go to court.

Early this year, another lawsuit, seeking $1 billion in damages, was filed against a group of companies in Texas. This suit accuses “the firms of using high-pressure, unlawful telemarketing tactics” to get buyers to pay prices beyond the real market for gold, platinum and silver coins.

May 2005 we sent an article, which is now on our Articles Page, alerting CMIGS’ client about the dangers of buying First Strike coins. Hopefully, we saved some clients the heartache of paying way too much for their gold. We know, however, that many buyers fell for the First Strike promotions and suffered losses. This morning’s caller was evidence.

At CMIGS, we recommend gold bullion coins, which sell at a few dollars over the value of their gold content. With bullion coins, buyers get more gold for the money. Still, we find ourselves spending a lot of time talking to buyers of overpriced gold coins, so much time that we feel morally obligated to tell these horror stories on our website in the hopes that would be buyers of overpriced coins learn the truth before they buy.

One of the tenants of Austrian Economic Theory is non-intervention in the marketplace. However, this concept is lost on economists who think that they know better than the marketplace when it comes to what the marketplace wants. The mortgage market is one such market where the interventionists delight in manipulation.

Now, the President himself has declared that there will be further intervention in the marketplace via the Federal Housing Administration. The president’s goal is to alleviate the pains caused by past intervention with still more intervention.

When Alan Greenspan took fed funds rates to 1%, the housing market took off as mortgage companies lent to anyone who could fog a mirror. The result was a housing mania, which has turned into a nightmare. Fedgov to the rescue.

In a clearly political move, last Friday President Bush announced a package intended to help homeowners refinance unserviceable mortgages through the Federal Housing Administration. The program, however, misses the target by a wide margin.

When Bush announced the program, it stipulated that borrowers eligible for relief could not be behind on their payments. Such a stipulation, of course, means that borrowers not needing help are eligible, but those behind on their payments will not be helped. How does this help the mortgage market, unless Bush’s advisors see it getting worse and those not now behind on payments maybe getting behind as things worsen? As the program is implemented, rules probably will be changed to bail out borrowers who have missed payments.

Meanwhile, Ben Bernanke, Fed Head, has declared his willingness “to grant further relief to U.S. financial markets.” I think that choice of words illustrates the awe that people hold for the Federal Reserve System. It will “grant further relief.” What it means is that the Fed is aware of the problem Greenspan created and is willing to print more money for temporary relief. (It is foregone conclusion that the Fed will lower its fed funds rate at its September meeting.)

More Fed intervention (the creation of more dollars and the lowering of interest rates) can only result in more price inflation. Monetary inflation is the cause; price inflation is the result.

The writer of the article linked above typically sees fedgov’s plans as beneficial. Few writers understand Austrian Economic Theory. Still others, who may have superficial knowledge of it, ignore it, probably because of having spent many hours in college being indoctrinated in the various economic theories that advocate government intervention. (I have a friend who actually believes that commerce could not exist without government rules!)

As this is written, the dollar is trading below 80 on FOREX markets. A drop through 79 could send the dollar spiraling, shot down by the too much government intervention in the US financial markets. Maybe a time to buy gold coins?