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
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
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 too.
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 their country?
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.
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
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