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The dollar rallies
January 7, 2005

Gold is down more than thirty dollars an ounce over the past thirty days as the dollar rallied against other currencies. A stronger dollar makes everything that is bought on international markets, and priced in dollars, less expensive -- including gold.

So what’s in store for 2005?

The big picture has not changed much from 2004. The United States is still running huge budget and trade deficits, the War on Terrorism is likely to heat up, not simmer down, and the US economy is still anemic.

Of course, there are many who would argue that the US economy is in fine shape, and that the dual deficits are nothing to worry about. Just this week, the Wall Street Journal published a survey of fifty-six economists that showed the US economy is expected to grow about 3.6% this year. Not too fast to fuel inflation and strong enough to create many new jobs. Apparently the corporate sector will be the powerhouse behind the growth.

What happened to the US consumer? Why isn’t the stalwart of US economic growth, the Consumer, going to be driving the US economy this year? Could the higher energy prices, higher interest rates and too much debt take a toll on the US Consumer?

If consumers are tapped out, what’s going to drive the corporate expansion? Corporations, by and large, produce goods and services that are bought by consumers. If consumption isn’t going to drive the economic recovery, how is the corporate sector going to grow?

No, I don’t think it’s going to be very easy for the US economy to grow its way out of debt. A much more likely scenario is for the US to devalue its self out of debt.

While the dollar has been rallying of late, I don’t think it’s the end of the dollar bear market. Not by a long shot.

Yes, the euro has perhaps been too strong, and it’s not unlikely that we’ll see a significant drop in the euro exchange rate. But I wouldn’t bet that the euro rally is over, or that the dollar bear market is a thing of the past.

I do expect the Chinese renminbi to start appreciating against the dollar in conjunction with the yen and all the other South East Asian currencies. This will take the pressure off the euro, which is likely to start trading sideways after a bout of volatility gets the hot money out of it.

We can expect interest rates to continue moving up in the US and, once this correction is behind us, the dollar should continue to move lower, with a more pronounced decline against Asian currencies than against the euro from now onwards.

For the past four years the US gold price has mimicked the dollar-euro exchange rate. That, too, should change and we should see the dollar-gold price start tracking the dollar’s exchange rate against the Asian currencies. The US has the largest trade deficits with Asia, and it is against those currencies that the dollar has to correct.

In the meantime, I this is an excellent time to pick up more gold related assets. Especially ones with leverage to the US dollar’s decline.

Paul van Eeden

PS Brent Cook, who is now a regular contributor to my paid newsletter, recently wrote an article about geology and geologists that you might find interesting. Look for "Beware of Geologists" on Kitco.

Paul van Eeden works primarily to find investments for his own portfolio and shares his investment ideas with subscribers to his weekly investment publication. For more information please visit his website (www.paulvaneeden.com) or contact his publisher at (800) 528-0559 or (602) 252-4477.

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