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.
The recent counter trend rally of the
U.S. dollar certainly has stimulated emotions, both
verbal and of a trading kind. Mouses around the world
clicked and hard drives whirred, as "astute"
traders moved out of their short dollar positions and
Gold. Each time $Gold fails to go straight up forever
emotions run high, and a manipulator can be found under
every bush. That investments are to give instantaneous
and continuous gratification continues the assumption.
This misconception, learned during the Great Stock Market
Bubble, just does not seem to fade. The motivation for
writing this week is that recent rally by the U.S. dollar,
which is creating an opportunity in Gold and Silver.
Much attention has been given to the dollar
index. Reliance on this index as a long term framework
for making investment decisions is dubious at best.
This index is a trade weighted index and as such does
not necessarily reflect the true value trends for the
dollar. As a trade-weighted index it reflects the dollar's
value about as well as the CPI reflects the performance
of inflation. Perhaps that both are produced by government
statisticians might be enough said.
A trade-weighted index is created by applying
weights to the movement of relative money values based
on the amount of trade between the countries. For example,
let us suppose that in the base period the U.S. did
not trade with Europe but did have a lot of trade with
the Noland, a small country off the west coast of China.
Subsequently, the dollar crashed against the Euro but
rose against Noland's currency. The trade-weighted index
would show the dollar going up. Nonsense.
This construction of the dollar index
therefore reflects more the relative value of trade
not market value changes of national monies. The S&P
500, and similar measures, weight the movement of securities
based on the total value of the market capitalization
of the underlying stocks. If it were calculated using
the methodology for the dollar index, MSFT's price change
might be weighted based on how much business it does
with, for example, GM. To the world, that the dollar
loses value against the Euro or the yen is more important
than if it gains value against a number of small trading
partners. While this exaggerates the situation, the
picture provides the message.
Short term use of the dollar index for
understanding may be of some value as the manipulations
of the statisticians are not as dominant influences.
What those analysis shows is nothing more than a counter
trend rally that is likely to fade, and indeed may be
already fading. For time and space purposes see, "Watch
the Trend, Not the Bounce" by James Turk. As this
article wisely advises, investors should keep their
eyes on the major trends and not react or worry about
bounces. Too many were probably expecting Gold to reach
US$500 NOW, rather than when the market is ready to
achieve that level.
Investments are generally viewed in two
ways, technically and fundamentally. What the technical
analysis portrays is that the dollar has been (1) breaking
to all times lows and (2) rallying against the down
trend. Neither of these conditions suggests the dollar
is ready to rocket upward. That all said, nothing is
to prevent the mouse clicking, fund traders from causing
the dollar to overshoot on the upside. The irrational
movement of the NASDAQ to recent unsustainable levels
is an example of what these funds can do if enough leverage
is applied in one direction in a desperate attempt to
Technical analysis of the dollar index
on a long-term basis may give not give an accurate picture
of the dollar's value. Shorter term analysis as done
in the article mentioned in the paragraph above are
somewhat more reliable. What is really important is
what the dollar is doing against major currencies. Falling
to record lows against the Euro is indeed an important
technical breakdown. Should the yuan every float, is
the dollar going to appreciate against it? This pent
up depreciation potential is naturally not a component
of the dollar index. The fundamentals, though, are where
the real story remains.
Ultimately, the "technicals"
will reflect the fundamentals of the dollar. As the
recent trade report indicated, the fundamentals have
not yet improved. More importantly they are not likely
to improve until one, the U.S. dollar collapses, or
two, the U.S. economy enters a massive recession. Until
that time the dollar will simply continue to depreciate.
Certainly that depreciation will not happen every day
or every week, but between now and the future it will.
A major problem with the dollar's fundamentals
is the shift in the nature of the trade deficit. In
years long past the trade deficit would rise and fall
with the value of the dollar in a natural rhythm. More
recently that trade deficit has taken on a structural
character as well as a cyclical character, though that
latter will have to wait for another time.
Chart One plots the dollar index, left
scale, along with a line for the cumulative trade deficit
of the U.S., using the right axis. In that chart are
also two triangles so that the time period covered can
be divided into three distinctive environments. Each
of these times has different characteristics with implications
for understanding how the dollar is likely to perform.
From the beginning of the chart, from
the left, to the first triangle, the dollar index and
the trade deficit seemed to move in some kind of harmony.
While overall the U.S. was running a trade deficit,
the size of that deficit did respond to changing values
for the dollar. Such as it is supposed to be according
to the textbooks. The error is expecting that type of
performance to be repeated currently. This time things
are indeed different.
In the years between the triangles, the
value of the dollar rose. That appreciation was fueled
by the Great Federal Reserve Stock Market Bubble I.
Expectations for the U.S. economy were distorted by
a misguided monetary policy. As the dollar appreciated,
the trade surplus worsened. Insatiable consumer demand
was stimulated by the Federal Reserve. During this era
the beginnings of the structural trade deficit began
to arise. Real work was no longer necessary. Stocks
and housing would make all rich. Consumers would just
sit naked around their computers ordering stuff off
the internet. The world would be wonderful, and the
NHL would always play the full season.
The latter period, after the second triangle,
is where the restructuring of the U.S. economy by the
Federal Reserve is starting to show its ugly head. Dollar
peaked almost three years ago. The U.S. trade deficit
has not improved. An improvement in the trade deficit
does normally lag the depreciation of a currency. However,
that turn in the trade deficit is just not evident.
This situation is unique, and suggests that something
other than a mere currency problem.
Much excitement greeted the announcement that 2.2 million
jobs were added in the U.S. during 2004. Of that number,
only 76,000 were added in manufacturing. The structural
problem of the U.S. economy starts becoming apparent
if one reflects on those numbers. If those 2.2 million
workers are fairly normal, they will likely spend their
incomes. A fairly reasonable assumption is that people
work so they have money to spend. But, only 76,000 more
people are making real stuff. Real stuff is real goods,
that can be touched and used. Ever try to wear an online
mortgage application? Ever try to use an online bank
statement as a kitchen table?
For every one new worker in a factory
making stuff, 29 new people were out spending their
income. 29 new people were out buying things, consuming,
for every one new person actually making something real.
Productivity cannot happen unless some workers are really
working. Where does the stuff wanted by those two million
new consumers come from? Those goods are just imported.
On balance, the U.S. is now forced to import $700+ billion,
at an annual rate, more goods than it sells to the world.
Why? Cause that is where the stuff is now made. U.S.
workers are too busy doing internet mortgages, speculating
on Florida condominiums and washing their SUVs to be
involved in making real stuff.
Last month the U.S. exported about $9
billion of consumer goods. If the dollar collapsed and
exports of consumer goods improved dramatically, the
impact on the U.S. trade deficit would not be much.
The U.S. simply does not make the stuff. By the way,
the U.S. also runs a deficit in advanced technology
goods. Do you think Dell makes all those computers in
a secret plant in Wyoming? Maybe if the dollar falls
far enough a bridge can be built so Europeans can drive
to Disney World, and spend their dollars there. Short
of a depression that might be the only way to remedy
the trade deficit, and the way Congress is spending
money the funding for the bridge might be possible.
About a quarter of the trade deficit is
with China. Does anyone believe that if the dollar's
value falls that Christmas trees, microwaves and toasters
would then be made in the U.S.? Maybe if it falls far
enough those factories making t-shirts will be moved
to the U.S. Maybe if the dollar falls far enough, oil
will spurt out of the ground all about us too. The U.S.
is importing about a $150 billion of oil per year now.
Will a lower value for the dollar suddenly create energy
independence? A structural trade deficit does not
change until the value of the money collapses to the
point that making toasters is cheaper at home than importing
them, or no one is willing to accept dollars in exchange
The structural problems will cause the
dollar's value to fall over time. Does that mean everyday?
No, of course not. The lemmings on Wall Street are trying
to rally the dollar, creating an opportunity in Gold
and Silver. You should be taking advantage of this opportunity.
Too many investors put more money into paper equity
mutual funds than Gold in recent weeks, and some day
they may be trying to pay bills with regrets.
Signs of another structural problem can be observed
in the second chart. In that chart is plotted the dollar
index and the U.S. money supply, M-1. The dollar index
uses the left axis. Money supply has been inverted and
uses the right axis. As the M-1 line goes down, the
size of the money supply gets larger. That methodology
just makes it easier to see the picture.
As more U.S. money is created the value
of it keeps going down. Quite simply, the world just
about has all the dollars it really wants. Another structural
problem therefore exists. The demand for dollars has
been sated. Can there be anybody in the entire world
that wants dollars that does not have them? Any attempt
to create more dollars will result in further depressing
the value of the dollar. The world's ability to adsorb
more dollars is approaching exhaustion.
So the Federal Reserve, with their secret
inflation fighting strategy, keeps increasing the number
of U.S. dollars in the world, and consumers keep sending
them to other countries. The world keeps not wanting
all those dollars. The dollars get sold and the value
goes down. The dollar value of Gold keeps rising because
of that. Nothing in the fundamentals has changed to
make the dollar worth more over time.
Less this sounds too pessimistic, sources
of optimism can be found. The solution to the problems
of the U.S. Social Security fund has been discovered.
We will turn the money over to Wall Street. Hey, they
made us all rich in 1999. Beauty of this solution is
incredible. Wall Street will manage that money in such
a way that Social Security deficit is eliminated and
all will retire with far greater retirement checks.
The beauty of this strategy simply can not be denied.
Given that Washington and Wall Street now seem to have
the solution to the problems with the U.S. Social Security
System, is owning Gold more or less wise?
Yes, the dollar can rally in the short-term
as the mouse clicking, fund managers attempt to play
a change in momentum. Their problem is that the global
financial market has far more dollars to sell than funds
have the ability to buy. Supply is just a whole lot
bigger than potential demand. So as the bobble heads
mouth on about growth in the U.S. economy, growth in
Europe, the PPI and whatever other nonsense they want,
you just keep buying Gold whenever the opportunity presents
The last chart, from The Value View Gold
Report, shows the recent record of US$Gold and our intermediate
indicator. Fund managers covering their dollar shorts
have created another opportunity for Gold buyers. Many
months have passed since the last buy signal. The latest
one was expected, and recently went out to our subscribers.
Whenever the fund managers are selling Gold and buying
dollars, an opportunity is being created for investors.
At this time next year, with
Gold over US$500 and Silver around US$9, wise investors
will be celebrating.
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.