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 with you.
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
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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