May 26, 2005
On Sunday France will hold a referendum to decide whether
the country should ratify the proposed constitution of the European Union.
Current polls indicate that a majority of the voters may vote against
ratifying the Constitution.
It is quite possible, then, that the recent strength in
the US dollar is a result of capital flowing out of euros and into dollars.
The euro has declined more than 4.5% against the dollar during the past
three months and the gold price, in US dollars, has been weak.
If France votes “No” on Sunday we could see
further erosion of the euro, increased strength in the dollar and weakness
in the gold price. Another possibility is that given the lack of sound
currencies investors will turn to gold itself, and the gold price might
benefit in spite of dollar weakness. I find the latter to be an attractive
possibility and it would certainly be my first choice, but we have not
seen gold benefit much from uncertainty in the past fifteen years, so
I suspect that instead of gold, the dollar will benefit the most from
If France votes “Yes” and ratifies the European
Constitution we could see the euro rally, the dollar fall and the gold
price rise. That would be good news for gold stocks and might catch a
few people off guard, as many anticipate weakness in gold stocks at least
Regardless of what happens on Sunday, we should keep our
eyes the dollar itself and the issues facing it. I am no fan of the dollar.
Recent weakness in the euro may have given it a boost, but we must remember
that the US trade deficit is putting immense pressure on the dollar. The
dollar has not declined significantly as a result of the trade deficit
only because Japan, China, and several other trading partners of the US
have been buying US treasuries, instead of selling their dollars into
foreign exchange markets to prevent their currencies from appreciating.
The party ends when these countries stop buying US Treasuries
with their trade dollars and convert them back into local currency instead.
That is why the key to the gold price, in my opinion, is whether China
will allow the renminbi to float and, if so, when.
Washington is putting tremendous pressure on China to let
its currency appreciate. If China complies it will eliminate China’s
need for US Treasuries. You can bet that Japan, together with many other
countries in Southeast Asia, will follow suit and let their currencies
appreciate as well. But then who is going to buy all the US debt that
Washington has to sell in order to finance its spending?
Net Foreign Official purchases of US Treasuries were negative
$14.98 billion in March this year. This was the largest net redemption
of US Treasuries by the Foreign Official sector since August 1998 and
the first net redemption since August 2003. A warning?
If the impact of this does not immediately strike you I
suggest you read my commentary from February 10th (available on my website
at www.paulvaneeden.com in the Commentary section). You may also find
it interesting that Ben Bernanke, a governor of the Federal Reserve Board
who is being nominated by President Bush to become Chair of his Council
of Economic Advisors, stated that there would be a measurable impact on
US interest rates if China stopped buying US Treasuries. Keep that in
mind when you read the February commentary, and next time you hear Treasury
Secretary John Snow call on China to revalue its currency.
The thought I would like to leave you with today is that
even though uncertainty about the European Constitution may be boosting
the dollar in the short term, the outlook for the dollar is grim. I will
be the first to admit that I have no idea how long this dollar strength
will last, or what is going to happen in Europe, but I will tell you that
I have a lot of patience and the surest bet I know of is a bet against
the dollar. For me, that means a bet on gold.
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
investment publication. For more information please visit his website (www.paulvaneeden.com)
or contact his publisher at (800) 528-0559 or (602) 252-4477.
This letter/article is not intended to meet your specific individual investment
needs and it is not tailored to your personal financial situation. Nothing contained
herein constitutes, is intended, or deemed to be -- either implied or otherwise
-- investment advice. This letter/article reflects the personal views and opinions
of Paul van Eeden and that is all it purports to be. While the information herein
is believed to be accurate and reliable it is not guaranteed or implied to be
so. The information herein may not be complete or correct; it is provided in
good faith but without any legal responsibility or obligation to provide future
updates. Neither Paul van Eeden, nor anyone else, accepts any responsibility,
or assumes any liability, whatsoever, for any direct, indirect or consequential
loss arising from the use of the information in this letter/article. The information
contained herein is subject to change without notice, may become outdated and
will not be updated. Paul van Eeden, entities that he controls, family, friends,
employees, associates, and others may have positions in securities mentioned,
or discussed, in this letter/article. While every attempt is made to avoid conflicts
of interest, such conflicts do arise from time to time. Whenever a conflict
of interest arises, every attempt is made to resolve such conflict in the best
possible interest of all parties, but you should not assume that your interest
would be placed ahead of anyone else’s interest in the event of a conflict
of interest. No part of this letter/article may be reproduced, copied, emailed,
faxed, or distributed (in any form) without the express written permission of
Paul van Eeden. Everything contained herein is subject to international copyright