November 26, 2004
I have been thinking about how simple, but difficult,
investing is. Figuring out the relationship between gold and the
dollar was not difficult. Understanding that the ballooning trade
deficit would eventually cause the dollar to fall was also easy.
The difficult part is acting on your beliefs when no one else agrees
Everyone knows the recipe for investing success: buy
low and sell high. But it means that you have to buy when almost
everyone else is selling, or “helpfully” telling you
that you should really be buying something else.
The opposite is true when you need to sell: prices
will be rising and more and more people will see the light and pour
their capital into the sector. At some point prices will be outright
expensive and the general sense would be that whatever is driving
the boom will continue to do so.
We could still be several years away from the top
in the gold price, or the bottom in the dollar, but it’s worthwhile
to think about your exit strategy now. How will you know when to
sell? There are several different strategies successful speculators
use to take money off the table; it’s not all that important
which strategy you adopt as long as you have one.
Since the US presidential election -- three weeks
ago -- the dollar has dropped 3.45% against an index of the G10
nations’ currencies and gold is up almost six percent. Even
Alan Greenspan is now saying that either the US dollar or the trade
deficit has to decline. Both cannot continue rising. I expect both
to decline. Devaluing the dollar is the market’s way of correcting
the trade deficit.
The trade deficit is a virtual guarantee that the
dollar will fall just like the budget deficit will cause interest
rates to rise. The combination of a falling dollar and rising interest
rates is going to hurt US consumers and US corporations. It also
means that the price of gold is heading much higher, in US dollars.
The latter is why I invested in US-based gold
exploration companies. It’s the best leverage to the declining
dollar that I can think of. If you have a better way to play the
falling dollar, let me know.
Paul van Eeden
Paul van Eeden works primarily to find investments for his
own portfolio and shares his investment ideas with subscribers to his weekly
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