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.
Monetary complacency is clearly not the
norm, as evidenced by the recent collapse of the U.S.
dollar. Clearly, some around the world are moving to
monies in which they have a higher store of faith. Having
been one of the bears on the U.S. dollar for some time,
the current circumstances do not come as a surprise.
With Gold recently reaching a new cyclical high, the
champagne corks popping can be heard in the background
of the e-mails we read. However, certain perspective
and coolness of thought must be retained. Breakfast
has different meaning to the chicken and the pig.
Questions and consideration on which
|| Will central banks readily surrender
to the fall of the dollar?
Has the dollar fallen too far too fast despite the
long-term bear market?
Is the dollar the only currency falling in value?
Is my home currency at risk also?
Should I be buying Gold or retaining my home currency?
Has the bear market for the dollar really started?
How does the dollars bear market end?
In money, survival of the fittest will
indeed be the rule. But, governments do not surrender
readily or easily.
The first question deals with whether
or not the central banks around the world will react
or respond to the dollars recent depreciation.
A lot of words have been wasted on the question of the
dollars fundamentals. Most of those positive utterances
were essentially nonsense, as the dollar s fundamentals
are just simply rotten. The simple fact is that too
many dollar assets are held around the world. Every
central bank around the world has got dollar assets
stacked in the closets, in the basements, or anywhere
else they can find room.
Markets in recent times have had a tendency
to move to an extreme. The current euphoria on the NASDAQ
and the recent experience in oil are fairly obvious
examples of market extremism. Oil prices one month are
in the mid-fifties and the next in the lower forties,
as an example. A subtle, and probably irrelevant, change
in news on oil inventories, caused a dramatic shift
in the price of oil. Similar events could unfold in
the market for dollars.
Many times investors want reasons for
a market acting in a certain way. Some fundamental related
to the real world, they believe, must be driving what
is happening in the market. Often the real fundamentals
are just the movement of money into and out of a sector
of the markets. Oil went to an extreme simply cause
too much money followed the signs of positive momentum.
In hindsight, no fundamentals were driving the price
of oil to the recent peak. The sell off of oil was simply
that money moving back out of that market. Money moving
is a fundamental of a market, but not the kind of factual
fundamentals so many seek.
The recent collapse of the U.S. dollars
value is related to money movement. Have the fundamentals
of the U.S. dollar really changed in the past few weeks?
More likely is that the dollars fall is simply
related to money movements in the market. That sell
the dollar attitude has pushed the level to roughly
the equivalent of $55 oil a few weeks back. Oil may
go higher in the long run and the dollar will no doubt
also go lower in the long run. But, the recent action
in the dollar appears more like an over sold condition
brought on by excessive short-term speculation.
Neither the Federal Reserve nor the European
Central Banks seem p rone t o intervention. Philosophically,
both institutions do not seem inclined to actually interfere
with market action. About the time the screams to do
something are the loudest is when the dollar market
will turn. Nothing was done when electricity prices
skyrocketed upward in California, and down the price
came. Oil is the most recent action. Unless some tangible
event can be identified neither central bank will intervene.
Rather, they will just let this recent market run exhaust
itself. Do note that such an attitude is what insures
the long-term bear market for the dollar remains intact.
Next week the Federal Reserve meets. Given
that the ECB did not raise rates, the Feds actions
will signal the seriousness of their attitude toward
the dollars problems. A rate increase of 25 basis
points would mean the U.S. will not take action to support
the dollar. The rate increase must be 50 basis points,
or more, to suggest that action is being taken to support
the dollar. 25 basis points, or less, is a signal that
selling the dollar is still the wisest long-term strategy.
Governments are not done supporting the
dollar, as buying of dollar debt continues. Though we
will see later the enthusiasm may be waning. Chart One
portrays the holdings of U.S. government and agency
debt by official institutions at the Federal Reserve.
These central banks have not yet ceased to accumulate
dollar denominated assets. Lately the accumulation actually
rose as more dollars were retained by these institutions.
Some central bankers may be nervous. They
may be in the press screaming for the U.S. to do something.
But, their jobs are important to them and most would
not actually care to work for a livelihood. For political
reasons, central banks are not joining in on the dollar
selling. Try to imagine a central banker, owning billions
of dollar debt, willingly taking an action to destroy
part of the value of those investments.
Taking a look at other statistics will
not identify widespread dollar fear. Selling of the
dollar by the broad, global public does not seem widespread.
U.S. monetary statistics do not indicate yet any wide
move out of the dollars. At some point boxes of dollars
will start appearing on planes returning to Washington,
but that does not yet appear to be happening. Wide spread
selling will occur, just not yet.
The negative short-term sentiment will
run till exhausted. Recent action suggests that this
sour, short-term mood is starting to wane. Many funds
and traders would like to take profits. December is
now in its second week. These groups do not like to
work hard or risk profits in the latter part of December.
These pseudo dollar bears are likely to book some profits.
Do not be surprised by a quick, sharp
rally for the dollar. Such a move would be consistent
with a bear market pattern. Rallies in a bear market
are upward thrusts, followed by long, slow declines.
At the present time, the psychology on the dollar and
God, while right in the long-term, is at an extreme
for today, and excessive. A bear market rally for the
dollar grows increasingly likely.
Gold, reflecting the excessive market
mood for the dollar, has been over bought . Short-term
enthusiasm is too high. A correction for Gold is due.
While many realize that, they refuse to admit to the
possibility. Gold is vulnerable in the short-term to
below $410 and Silver to $7. While a correction will
frustrate some, long-term inves t ors will use these
lower prices as buying opportunities.
Many investors, rather than simply focusing
on the dollar problems and Golds move, should
be paying more attention to their individual situation
and national money. In previous articles the Gold price
of national monies has been discussed. Readers unfamiliar
with this work should review them in the archives of
one of the popular Gold web sites.
The reason for focusing on the Gold price
of national monies is that this approach helps to understand
the true movement in a national money. Your national
money may be going up versus the dollar, but losing
value versus Gold. Chart Two plots the recent trend
of some important national monies. In terms of Gold,
none have been gaining value regardless of what they
have done against the dollar. Attention should be focused
on the true value of your money, not the dollar value.
As is apparent from the graph, none of the four major
currencies plotted have a positive trend in terms of
The following table helps further to understand
the trend for the true value of national monies. Only
one, South Africa, of the eight national monies has
been experiencing a rising Gold value. Yes, the U.S.
dollar may have been the worst performer. Note though
that the rest are also losing value versus Gold. The
point? Each investor needs to assess the true fundamentals
of their own national money. Should the investor own
gold or their national money? What your national money
is doing versus the dollar is interesting but not the
This work on the Gold price of national
monies is beginning to produce some interesting results,
which will begin appearing in the monthly newsletter
in December. Such measurements can be used to determine,
for example, if a Russian investors should buy Gold.
Today the answer is that a Russian investor should not
be moving into Gold.The South African money has the
same evaluation, but nervousness on that opinion is
extremely high. UK investors are in the reverse situation.
UK based investors should be converting pounds into
ounces by buying Gold.
Each national money has an individual
situation versus Gold at any one time. Each individual
investor needs to be deciding on the wisdom of holding
the money or buying Gold. Learning to think and work
in the Gold price of national monies will help you do
that. Focus not simply on the dollars action,
but the appropriate buy/hold/sell decision on Gold from
the perspective of your own national money.
We need to return to our final questions.
Has the bear market started for the U.S. dollar? Of
course the answer is yes. In fact, it started two years
ago. Only recently has this condition become popular
The important point is that the U.S. dollar
is somewhere between the start and the end of a bear
market. Regrettably, today is far closer to the beginning
than the end. The deterioration in the value of t he
dollar has not yet caused either major panic, major
selling, or a major change in the U.S. economic situation.
The dollars bear market end will
be identified by two conditions. Chart Three will identify
the first of those conditions. Foreign official institutions
remain net buyers of U.S. dollar debt as shown in that
graph. When that graph shows serious and prolonged net
selling by these institutions, the first condition for
the end of the dollars bear market will have arrived.
That selling will be contrary indicator, kind of like
when the UK sold Gold, and probably bought some U.S.
The second condition is U.S. interest
rates. At the end of the bear market for the dollar,
U.S. interest rates will be well into double digits.
A prime rate in the 20-30% range is certainly likely.
Trying to sell a home will be only slightly easier than
selling season tickets to the Miami Dolphins at the
present time. Capital controls will be widespread, and
U.S. citizens will be restricted on moving money out
of the country. Rather than confiscate your Gold, a
more likely event will be an exchange of new
U.S. money for old U.S. money with serious
No one ever contended the road to US$1,300
Gold would be a fun one. Also, no one ever said it would
be a straight road. Rallies and corrections are the
patterns that come together to create a market move.
Be selective in the timing of your Gold purchases. If
you ever hear yourself saying that y ou must buy today
cause the market is getting away from you, stand up
and turn of f y our computer. And finally, each individual
investor needs to assess the situation for their own
national money versus Gold. Do not take comfort in the
fact that you do not own U.S. dollars for in reality
your money may also be depreciating versus Gold.
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 email@example.com.