Follow the Yellow Brick Road

"Better get under cover, Sylvester. There's a storm blowin' up a whopper, to use the vernacular of the peasantry"
--Professor Marvel (The Wizard of Oz)

For many years holders of precious metals have been posing the question of "What would drive gold and silver wildly higher?" The answer inevitably relates to situations where governments embark on fanatical campaigns to debase their currencies--likely in desperate attempts to keep the wheels on sputtering economic wagons.

It's hard not to wonder whether we're approaching that point. Recent salvos by the Fed, ECB, BOJ, IMF et al suggest that central banks are boldly prepared to do whatever it takes to 'manufacture inflation.'

Previous discussion focused on the vulnerability of the dollar to Big Debasement, due to the fiscal probs here in the US. Increasingly, however, folks seem to be recognizing that all currencies are in the same boat--unbacked and subject to political manipulation. Beggar thy neighbor policies have all currencies in a race for the bottom.

In competitive debasement scenarios, cross rates may not change much. A devaluation in the dollar, for instance, is meant with commensurate devaluation of the euro.

What does change is the purchasing power of currency in hand. Dollars, euros, etc will buy less because there are more of them. The historical reference for gauging this loss of purchasing power is gold.

The strong moves in gold and silver may reflect more people waking up to this fact. The recent move does not look like past moves, and the price action is getting 'wide and loose.'

To me, this means we're either close to a near term top based on investor overreaction to recent central bank rhetoric, or we're approaching a launch toward an entirely new frame of reference. In previous situations like this, I've been prone to favor the trading top argument.

Given the macro picture, however, the 'launch' argument seems dismissible only at one's own peril.

positions in gold, silver, Treasuries