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, Good Time To Sell The
The recent defeat, by French and
Danish voters, of the EU's new constitution has provided
an excellent opportunity for dollar handicapped investors
to sell dollars and buy Gold. Market action that increases
the over valuation of the dollar are rare, and should
not be ignored. In short, dollar optimism has been pushed
to an extreme by this event. Sell your dollars to the
dollar bulls, and buy Gold.
This article, intended as a short
one, is not a defense of the EU treaty, but rather a
note that the dollar's optimism is over extended. Nor
is the idea that the EU's economic fundamentals are
ideal put forth. Rather, this writing is simply a reminder
that the U.S. is the one that owes the rest of the world
about two trillion dollars not the EU. The European
Central Bank, the EU's central bank, is not the entity
that has engineered two massive speculative bubbles
that have destroyed the economic competitiveness of
the nation. The Federal Reserve is the central bank
that has done that. We should be always selling the
currency of the more weakly managed central bank when
over optimism provides an opportunity to do so.
The first graph portrays several
measures. The triangles are $Gold, plotted using the
left scale. The second is an oscillator of sentiment
for the U.S. dollar. This latter measure has been inverted
and is plotted on the right hand axis. The oscillator's
range is plotted so that zero(0) is maximum pessimism
and -100 is maximum optimism. Reason for this method
of plotting is so that the lines give a more easily
understood visible picture. The oscillator is a measure
of longer term relative sentiment using a stochastic
calculation. As it is intended as a longer term measure,
short term readings are neither calculated nor available.
As is apparent in the graph, the
oscillator reached maximum pessimism in the early part
of the graph. At that time, $Gold was in the $450 range.
About that time the mouse clickers residing at hedge
funds decided that the dollar was on the verge of a
major bottom. Around the globe, the mouse clickers all
fixated on the same graph of the dollar index. The mice
all clicked at the same time, declaring a major bottom
for the dollar. All that need be said about that is
one of the unfailing technical rules is that all popular
support and resistance levels are taken out. That overly
popular bottom in the $ index will fall to this rule
The dollar has now reached,
as shown in the first graph, an extreme level of optimism.
$Gold has moved down from the $450 level to about $415,
and started to bounce as a result of the extreme level
of emotions. That the dollar
has reached such a level of optimism and that $Gold
is now turning suggests that dollar handicapped investors
should be moving into Gold. Euro denominated
investors should not be moving into Gold.
That all said, part of the motivation for this article
is to discuss the vote on the EU treaty and any possible
meaning. Such a goal can not be achieved in one short
writing. The most vicious emails we have ever received
have been a consequence of comments about the French.
So be it, for if one is too be criticized that criticism
might as well come from someone in an insignificant
province of the EU. In short, the French no vote on
the EU treaty was largely a vote by the spoiled brats
on the left in that nation. Despite the headlines, only
about 39% of French and Danish voters were opposed to
the treaty. 61% of the voters in those countries were
either in favor of the treaty or felt it so unimportant
that they did not vote. That out of the way, we will
now be nice to our French readers for the remainders
of this article.;)
Should the EU treaty be approved? The Economist, one
of the favorite magazines of Gold bugs, has opposed
approval of the treaty. A recent article in that magazine
went, "No would be the right answer in the next
week's French and Dutch referendums and a good one for
Europe"(Economist,2005,11). The treaty runs from
200-300 pages, depending on the language and printing
and the source. Any referendum that long put to the
voters should probably be rejected. Would the U.S. or
Canada vote to approve a new 200 page constitution for
Is the EU destined for collapse? The answer would have
to be no. Formation of a new "nation", if
that is what the EU is to be, takes time and pain. For
a good history lesson, read of the writing of the U.S.
Declaration of Independence. Had one opponent, a true
gentleman in all the meanings of the word, not left
the room during the vote, it might have not been approved.
The Articles of Confederation was a non starter even
as the ink dried. Any reading of the local news of that
era would have suggested that the U.S. was bound to
collapse. Imagine the wisdom and results of shorting
the U.S. in 1799.
The popular press keeps being misled by a few ostriches
which teach economics in modern academia. A recent Business
Week article "Squeezed by the Euro" is a good
example, 2 June issue, One of their delusions is called
Optimal Currency Area(OCA) theory. Do not waste any
time reading articles on the matter. In short, the theory
says that only those people with perfect correlation
of their economic activities should have the same currency.
Applied strictly to the U.S., the nation would still
have a minimum of 13 currencies. Good idea?
Applied to Europe, the theory says that the Euro should
not have been introduced until all and every possible
improvements in the laws, regulations, labor relations,
and cultural differences in Europe had been achieved.
Canada and the U.S., under the application of their
thinking, would still be waiting for one common currency
for their nations. Good idea?
The critics of the Euro essentially say that everything
should have been made perfect, like their graphical
delusions on the blackboard, before the Euro was introduced.
Perfection is only possible by one entity, and certainly
politicians, economists and labor leaders in Europe
are not that entity. The Euro was introduced before
economic perfection, and there lies the rub.
The EU is primarily a monetary union. The new EU constitution
was a move toward political unity. Clearly, the citizens
of part of Europe are not ready for the latter. That
decision is understandable. That France is not ready
to accept being a province of the EU rather than an
independent nation is a view that can be appreciated.
Political unity, and submission to that unity, takes
time. The EU's new treaty was too much too soon.
The Euro has removed a crutch from the economic policies
of many European provinces. Currency depreciation is
no longer possible. Fundamental change must come in
Europe as a result of the EU, and many voters do not
like it. France, with the second highest tax burden
in the EU, can not achieve economic growth without cutting
taxes. Cutting taxes means that some one with a soft
job and early retirement will now have to really work.
Scarey thought for some voters.
Change will come to France just as it has come to workers
and firms in the U.S. Companies no longer competitive
on a world scale will fail, and the jobs will disappear.
Survival of the fittest is a rule of the global market
place, and is the source of long term prosperity for
the greatest number of individuals. Frits Bolkestein
summed it up best, "Before the euro it[Italy] could
compensate fo the loss[ of competitiveness] by devaluing
from time to time. It now faces the need for adjustment
in the real economy, which is painful"(Bolkestein,2005,17
). Some voters are unhappy that currency devaluation
is no longer available, but to investors that is good
The Euro is now the largest national money brand in
the world. Nations have been pushing to join. Their
citizens already use the Euro in their daily lives.
Russia is likely to move to the Euro, and may some day
price Russian oil in Euros rather dollars. What
nations are lining up to join the dollar? Answer
is none. Are Chavez and Lopez likely to push their nations
to drop their national monies and convert to the dollar?
This article was intended as a short one, and it will
be. These matter will be explored more in the monthly
letter. The failure of the current EU treaty means that
political unity in the EU is not imminent, and that
it will be a demographic rather than democratic process.
Monetary union will remain. The EU treaty vote pushed
dollar optimism to a extreme. As shown in the last chart,
such times are excellent buying opportunity for Gold
investors. That said, $Gold is short-term overbought.
Use any price corrections to
add to positions. One must be on the train to arrive
at the $1,300 station!
A song for Europe. (2005, May 28), The
Bolkestein, Frits. France's verdict tells us that Europe
has been oversold.(2005,May 31), The Financial Times,17.
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.