|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, IS LOVE FADING ?
Foreign investors have been more than
willing to finance the consumption binge of U.S. consumers
and the structural imbalance in trade created by Federal
Reserve policies. The current "measured" rate
of change in U.S. interest rates reflects the muddled,
not measured, policy of the Federal Reserve. As long
as the Federal Reserve fails to acknowledge that a housing
bubble has been driving the U.S. economy, the U.S. trade
deficit will keep inching toward the terminal phase
for the U.S. dollar. With the structural nature of
the U.S. trade deficit, only a recession of massive
proportion will reduce the trade deficit. Muddling though
is the latest strategy of the Federal Reserve, and it
will likely have as little success as previous policies.
Many have wondered when, not if, foreign
investors might lose their enthusiasm for buying U.S.
debt. From available data, the notion that the love
affair is fading seems reasonable. Few question
that a limit exists to the amount of U.S. debt that
foreign central banks will ultimately buy. The question
remains when will the limit be hit, not if. Foreign
central banks can not be relied on to continue funding
an extra $700 billion per year of the consumption binge
of the U.S. They might like to as it keeps their citizens
working, making products to sell to U.S. consumers.
But, debt does not create prosperity.
U.S. government debt, including agencies, is held by
two types of foreign investors, central banks and individual
investors. That latter group would include the whole
list other than central banks. Central banks hold these
reserves for two reasons. Liquid savings for future
needs would be one. Another is the much discussed effort
to prevent the dollar from depreciating against their
national monies in a way that would hinder the U.S.'s
ability to buy foreign goods.
Each week the Federal Reserve releases a plethora of
data on banks and monetary measures. Included within
that data are the holdings at the Federal Reserve of
U.S. government debt in the name of foreign institutions.
Since this data is weekly, it provides an easy and quick
way of assessing the investment inclinations of foreign
The first chart, labeled First Chart, portrays the year-to-year
change in the level of those holdings, using bars and
the left scale. The picture is of a mountain, and
the current position appears to be on the down slope.
Foreign central banks have acquired over US$200 billion
of U.S. government debt in the past year. The
rate of accumulation has slowed dramatically.
Not too many months ago, as the chart shows, they were
buying them at almost a $340 billion annual rate.
In that chart is also drawn a line that represents the
trend line for the weekly change in central bank
holdings, using the right axis. Again, a nice negative
slope is evident. That line, in addition to the mountain
shaped bars, suggests that a shift is developing toward
central banks buying less U.S. government debt. We do
note considerable enthusiasm being generated in Washington
to reduce or eliminate the U.S. deficit. Well maybe
they will actually do something about it, and perhaps
pigs can indeed fly.
In the previous chart the year-to-year change in holdings
of official institutions was the concern. The second
chart considers the weekly changes. As with all data,
week-to-week numbers can have a lot of noise in them.
What is plotted in this graph is the three-week moving
sum of the week-to-week changes in those holdings. Each
point, therefore, represents the sum of the net change
in these holdings over the previous three weeks. A tend
line has also been included to highlight the tendency
in the data. All data is in billions of U.S. dollars.
Notice the veracious appetite for U.S. debt by foreign
central banks shortly after the end of 2003. The three-week
moving sum approached $40 billion, or about $500 billion
at an annual rate. Some massive purchases of U.S. government
debt were being made. In April of last year purchases
began to moderate, in part due to Japan's reducing its
role in supporting the U.S. dollar. Maybe the Japanese
finally know a bad investment when they see it, for
they have lost considerable money in U.S. government
That hunger for U.S. debt by foreign central banks has
certainly been tempered. Is their love for buying this
debt over? Perhaps so. Notice that the three-week
moving sum has rarely been negative. The latest
data point is negative, and more negative than the previous
one. Are we witnessing "lower highs and lower
This data does not yet suggest that central banks now
feel they have all the U.S. dollar debt that is appropriate,
but that their buying has definitely slowed.
Anecdotal evidence does suggest that central banks are
in the process of diversifying their reserve holdings.
The important issue is not the composition of central
bank reserves last year, but rather what their holdings
will be like at the end of the coming year or next year.
And at some point even a central banker, except for
those from the UK, will come to understand the lack
of wisdom, to be kind, in selling Gold and buying U.S.
dollars. Imagine how much purchasing
power central banks have lost by holding dollar denominated
paper assets in the past year?
Around the world we have been witnessing the process
of individuals and businesses moving to monies in which
they have higher faith. The average person walking the
street almost anywhere in the world realizes that converting
dollars to Euros has been the smart move. Converting
almost any money into Euros has been the smart move.
That understanding is even starting to creep into the
thinking of the average American.
The collapse of the NASDAQ since the end of year is
likely the beginning of the continuation of the bear
market in U.S. equities. Shown in the Third Chart is
the dismal record of U.S. equities for the past number
of years. For more than five years, Gold has done better
than stocks. And we must note that Gold has had a positive
record for the past five years while equities have lost
value. With the negative record of U.S. equities, are
foreign investors likely to be rushing to place their
life savings in dollar denominated stocks? With the
record shown in that chart how does an investment advisor
get someone to be invested 90% in stock and 10% in Gold?
How long will it be before the
ten-year record on stocks turns negative? Admittedly
that question verges on heresy. How many times have
you heard that stocks NEVER lose money over a ten-year
period? Such a rationale is one argument for shifting
the U.S. Social Security System to stocks. But, you
want to know the really scarey one? Some are noting
that over 60 year periods one CAN NOT lose money in
stocks. That kind of absolute certainty should scare
anyone out of the generic stock market. On the other
hand, reruns of old Three Stooges' movies on cable business
channels might be a dose of needed integrity for the
investment community. Anyone remember the name of the
Stooges' law firm?
If ever a reason existed to own Gold, it would be the
situation with government-sponsored retirement schemes.
At some point the answer to the problem is a choice
between two undesirable alternatives. Taxing the citizens
into poverty and rebellion in order to pay retirement
benefits to baby boomers is one possibility. The
other is for the central banks to purchase the bond
holdings of the retirement plans through their money
creation power. Worry though is not necessary. Everyone
will get their retirement due from their government.
The real question? What will it buy?
For several weeks many in the investment world have
decided that the U.S. dollar is due for a long run of
appreciation. Curious. Other than funds buying for a
trade, who is going to buy the dollar? Is the average
investor in China or Europe going to start loading up
on dollars? This period of dollar delusion will pass,
and when it does $Gold will again start rising. Reality
is important, for the U.S. has to find buyers for more
than 13 billion green dollars each and every week.
May we take your order?
When the recent trend line for $Gold is broken,
a giant flashing BUY will
That ensuing rally will
carry to a new high!
In the last chart is drawn a trend line down the recent
correction in $Gold. Every individual with a charting
system, or access to one, has drawn that trend line.
No technical pattern has probably become as popular
as that one. That brings us to one of the most important
rules of charting. All popular
support and resistance levels, which includes trend
lines, are taken out with a vengeance. That trend
line will be broken, and it will flash a massive buy
signal. Will you be long Gold or watching?
Silver is in a different pattern, as widely known. A
lateral pattern has been building in Silver for some
time. Lateral patterns are some of the favorites of
long time charters as they are so powerful when they
end. Silver above $7 will quickly
become Silver at $8.
For a thought to close with, think about all these discussions
of government retirement plans. So many baby booms will
be retiring that globally these government-sponsored
plans are going to be hemorrhaging cash. Ok that is
one matter, but another question needs to be answered.
To whom are all those retired people going to sell
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.