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
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 shot.
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
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"
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