|Moneyization: The global financial phenomenon
of individuals and businesses moving their funds to monies
in which they have the highest confidence, or money which
has a higher store of faith.
Or, Money Is A Flow Not A Balance:
The Westphalian based model for money has been fading
for sometime, and probably should have been declared
dead many decades ago. National borders mean no more
to financial and money flows than they do to the lowly
sparrow. Neither money nor sparrows stop at borders.
Individuals, all around the globe, now choose their
money, not governments!
Money flows around the world rather than resides
as a balance. Think about your checking account. The
flows are most important, they determine your balance.
As Cohen has written, "Currency domains properly
speaking are social spaces, defined not by political
frontiers but by the range of each money's effective
use and authority: 'space-of-flows,' to use an increasingly
popular expression . . ."(Cohen,1998,p.21).
The flow of money should be our focus, and the direction
of that flow is to the Euro and away from the U.S. dollar.
Readers would find Cohen's 1998 good background, but
his 2004 work, The Future of Money, would be more beneficial.
Cohen's important contributions to the thinking on money
are currently part of our monthly effort. While not
widely known to the investing community, his insights
would probably thrill many of those that are seriously
considering what money will be like in the future.
The first chart is derived from data originally created
for a previous article on the growing importance of
the Euro. In that work the Euro was considered as a
balance, or how much of exists at a point in time. In
this chart the Euro is considered as a flow. The bars
represent the U.S. dollar value of the cumulative flow
into Euros since July 2003, using the left axis. Triangles
represent the U.S. dollar price of Gold.
As readily apparent from the chart, the Euro has benefitted
from a strong flow into that global money. This flow
is a combination of quantity and price. As we all know,
the value of the Euro relative to other national monies,
particularly the dollar, has risen. At the same time,
the Euro has attracted a flow from neighboring countries
and others. Owning the Euro has become fashionable.
Owning the U.S. dollar has become unfashionable. Just
with restaurants when they become faddish, customers
are joyfully entering the front door. The same is happening
with the Euro, the money "restaurant" of choice.
This movement is the manifestation of moneyization.
The U.S. dollar price of Gold, represented by the triangles
and using the right axis, has risen as global money
users have voted with their wallets. They do not desire
to dine at the "dollar diner" when the "Euro
café" has seating available. Especially
with the Chinese national money remaining inflexible,
the Euro is the national money of choice. The flow
is into the Euro. That reality means that the Gold
price of the dollar will continue to decline, and that
the U.S. dollar price of Gold should continue to rise.
Importantly, this flow into the Euro has created the
necessary "monetary mass" to cause it to be
acceptable around the world. Robert Mundell, Nobel Prize
winner and one of the Euro's 'godfathers,' "When
the euro was created it instantly became the second
most important currency in the world "(Mundell,2003,p.21).
Further Mundell wrote, "Monetary mass is important"(Mundell,2003,p.21).
That mass is a strong magnet. All about the EU, countries
are lining up at the "Euro café" for
seating. How many countries
are lining up to abandon their national money in exchange
for the U.S. dollar?
The reality that the central banks of nations, such
as Korea, might begin to diversify their holding came
as a real shock to those still addicted to paper assets.
Gold and Silver investors had foreseen this possibility
for some time. But hey, we are not uppity. Any of those
holders of paper assets ready to admit their debilitating
addiction are welcome into the "Gold/Silver café".
Come on in, plenty of seating available for the next
serving. The grand buffet, the Super Cycle to US$1,300,
is only now being prepared.
The second chart is an update of one that recently appeared
in The Value View Gold Report and a recent Moneyization
article. The Federal Reserve reports weekly the holdings
of U.S. government debt by foreign official institutions
held at the Federal Reserve. Portrayed in the chart,
with bars, is the year-to-year change in those balances.
While still rising, the rate of acquisition, buying,
has slowed dramatically. Momentum always slows before
any series turns down.
These holdings of U.S. government debt by foreign institutions
at the Federal Reserves did go to a new high last week,
despite the Korean announcement. The weekly increase,
$20+ billion, was the largest weekly increase since
January of 2004. This large jump came at a time similar
to last year, suggesting that it may be a seasonal flow
rather than indicative of current investment trends.
Across the chart is a line indicating the trend of the
weekly changes, and it has a decidedly negative slope.
Foreign official institutions have not yet started to
sell U.S. debt, but the flows are consistent with the
Korean announcement of a move to diversify holdings.
The reasons for investor concern over the willingness
of foreign investors to purchase U.S. debt are related
to the value of the dollar and U.S. interest rates.
Ultimately foreign central banks will reach the limit
to which they will support U.S. debt. Interest rates
will rise in the U.S. despite the "measured and
meandering" policies of the Federal Reserve. As
the U.S. economy has been supported largely by a housing
bubble, that economic sector will be the epicenter of
the coming U.S. mega-recession. Already housing
trends are suggesting concern, and any major increase
in interest rates would be devastating.
All markets are moved by money, and despite the wishful
thinking of some ego-economists, so is the U.S. housing
industry. More important, U.S. housing prices, like
most around the world, are entirely supported by debt.
Without the flow of money from borrowings, housing prices
could not go up. For that reason, the third chart is
of importance. Money flows, though different
ones, are pushing up the Euro's value and U.S. housing
prices. However, the flow to housing is slowing! For
a start, Fannie Mae is going to reduce the size of the
firm's mortgage portfolio(FT,24 Feb 2005,23)
The third chart is of the index of applications for
mortgage loans to purchase housing, and this weekly
data comes from the Mortgage Bankers Association. A
little over a year is covered by the line connected
circles which represents the weekly plot. Also included
in the chart is a line which represents the 25-week
moving average of the data.
As is apparent, applications have faltered thus far
in 2005. The current plots are well below the moving
average suggesting some weakness in the demand for loans
to buy housing. Weather could be a problem. Maybe everyone
was so interested in football this year they had little
time to go look at houses. Or maybe, much of the demand
for housing has been satisfied, a scarey thought. Whatever
the causes, should this series not show a decided improvement
in the next few weeks serious concern for U.S. housing
would be appropriate. And despite what the housing
bulls say, if people do not borrow money to buy houses
the price of houses will not rise.
Any move by foreign investors to shun purchases of U.S.
debt will push up interest rates in the U.S. That action
would indeed be the end for the Housing Bubble in the
U.S. And before we get all those emails about the guaranteed
nature of housing prices, without money flowing into
a market prices do not go up. That reality is not open
to discussion. The implications of a downturn in U.S.
housing along with a devaluing dollar are quite ominous.
And remember the same things were said about U.S. stock
market returns a few years back, and which has now produced
a negative return for more than five years.
And finally for the believers in housing, consider the
25 Feb report on existing home sales from the National
Association of Realtors(marketwatch.com). They revised
their data for 2004, still a strong year BUT 10% lower
than previously estimated. Actual sales were 90% of
the previous estimate. Further,
the peak was in June of 2004 at 7.02 million annualized
units, more than 8 months ago. Both December
and January were about 4% below that level.
Refuge does exist though from the depreciating dollar
and the imminent bust in U.S. housing prices, as many
readers now understand. Gold and Silver provide protection
from the continued "measured and meandering"
policies of the Federal Reserve. Periodic rallies in
the dollar's long term down trend provide opportunities
form of weaker prices for the precious metals. These
periods of price weakness, as shown in the last chart,
Currently, the indicators suggest that both Gold and
Silver are over bought. A retracement to US$425 is possible,
a prelude to a move to US$440+.What is likely developing
is the first indication of the upper band of the new
channel into which they are moving. $1,300 Gold is not
destined to happen immediately but over time. Periods
of price weakness, when they develop, should be used
as buying opportunities. Investors need to be positioned
to participate in the Gold Super Cycle now developing,
and not remained mired in paper assets.
Cohen, B. J.(1998). The geography of
money. Ithaca: Cornell University Press.
Mundell, R.A.(2003). Currency areas, exchange rate systems,
and international monetary reform. In Salvatore, D.,
Deon, J.W. & Willett, T.D.(Eds.), The Dollarization
Debate(pp.17-45). New York: Oxford University Press.
Ned W. Schmidt,CFA,CEBS
is publisher of THE VALUE VIEW GOLD REPORT. That report
now includes a weekly message, TRADING THOUGHTS, to
help investors identify timely points for buying Gold
and Silver. You can join him for the Gold Super Cycle
His monumental report, "$1,265 GOLD", which
has now been read in 12 countries, has 255 pages and
98 graphs, is available at www.amazon.com
or from the author. Ned welcomes your comments and questions.
His mission in life is to rescue investors from the
abyss of financial assets and the coming collapse of
the U.S. dollar. He can be contacted at firstname.lastname@example.org.