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
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 create performance.
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
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
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
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
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 for toasters.
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
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
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
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
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