The dollar rallies
January 7, 2005
Gold is down more than thirty dollars an ounce over
the past thirty days as the dollar rallied against other currencies.
A stronger dollar makes everything that is bought on international
markets, and priced in dollars, less expensive -- including gold.
So what’s in store for 2005?
The big picture has not changed much from 2004. The
United States is still running huge budget and trade deficits, the
War on Terrorism is likely to heat up, not simmer down, and the
US economy is still anemic.
Of course, there are many who would argue that the
US economy is in fine shape, and that the dual deficits are nothing
to worry about. Just this week, the Wall Street Journal published
a survey of fifty-six economists that showed the US economy is expected
to grow about 3.6% this year. Not too fast to fuel inflation and
strong enough to create many new jobs. Apparently the corporate
sector will be the powerhouse behind the growth.
What happened to the US consumer? Why isn’t
the stalwart of US economic growth, the Consumer, going to be driving
the US economy this year? Could the higher energy prices, higher
interest rates and too much debt take a toll on the US Consumer?
If consumers are tapped out, what’s going to
drive the corporate expansion? Corporations, by and large, produce
goods and services that are bought by consumers. If consumption
isn’t going to drive the economic recovery, how is the corporate
sector going to grow?
No, I don’t think it’s going to be very
easy for the US economy to grow its way out of debt. A much more
likely scenario is for the US to devalue its self out of debt.
While the dollar has been rallying of late, I don’t
think it’s the end of the dollar bear market. Not by a long
Yes, the euro has perhaps been too strong, and it’s
not unlikely that we’ll see a significant drop in the euro
exchange rate. But I wouldn’t bet that the euro rally is over,
or that the dollar bear market is a thing of the past.
I do expect the Chinese renminbi to start appreciating
against the dollar in conjunction with the yen and all the other
South East Asian currencies. This will take the pressure off the
euro, which is likely to start trading sideways after a bout of
volatility gets the hot money out of it.
We can expect interest rates to continue moving up
in the US and, once this correction is behind us, the dollar should
continue to move lower, with a more pronounced decline against Asian
currencies than against the euro from now onwards.
For the past four years the US gold price has mimicked
the dollar-euro exchange rate. That, too, should change and we should
see the dollar-gold price start tracking the dollar’s exchange
rate against the Asian currencies. The US has the largest trade
deficits with Asia, and it is against those currencies that the
dollar has to correct.
In the meantime, I this is an excellent time to pick
up more gold related assets. Especially ones with leverage to the
US dollar’s decline.
Paul van Eeden
PS Brent Cook, who is now a regular contributor
to my paid newsletter, recently wrote an article about geology and
geologists that you might find interesting. Look for "Beware
of Geologists" on Kitco.
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