Gold and the Dollar: Putting the Relative Cart Before the Relative Horse
I'm not a goldbug. Way back on April 16th I wrote as part of this post, "Give me a fundamentally sound reason to buy the dollar, and I will." I don't belong to the world of kneejerk hatred of fiat currencies, conspiracy theories and suchlike. For one thing, there's a big difference between the utopian world of the perfectly smooth capital market (doesn't exist) and the wholesale manipulation paranoia promoted by GATA and company. For me, being dollar bull/dollar bear is all about the macrofundies, and up to now the structural weaknesses in the dollar have precluded me from buying into the currency. At the same time gold has seemed to me a far better alternative as a means of capital preservation.
This has worked well for me in the last three years. I bought bullion at U$451/oz, and I'm a million miles ahead of the person who put his dollars into a time deposit account and now wants to buy a few ounces of gold. However the trade has obviously unwound somewhat in the last month. The dollar index [USD] has moved from under 72 to over 77, and at the same time gold has made its headline-making plummet to under $800/oz.
The question I've been mulling over this morning is "Is the current USD move from approx. USD 72 to approx. USD 77 backed up by the sound fundamentals I need?" (and if you're wondering, YES, this is the type of baloney a financial wonk thinks about while laying in bed late on a Sunday morning...sad, ain't it?).
Here's what I think: The dollar's move has been backed up by China's central bank buying into US treasuries in a direct way (i.e. via the New York Fed deposits mentioned in this post and looked at in far greater detail by the excellent Brad Setser in his blog). The $29bn noted by Setser is a very large chunk of change, and by pumping it straight into treasuries the US gov't has successfully rallied the dollar. Once the ball gets rolling, more money jumps on and the rally snowballs. Here we are today. But is it a fundamentally sound position?
To me and my fundamental mindset, this current US dollar move puts the cart before the horse. You see, the base of all this is the country's economy. A strong economy is the horse, and its currency is the cart. If the economy is strong, this will be reflected in its currency. As a couple of very simple examples (used as pure illustration of this basic point in economics), look at the relationship between Brazil's motoring economy and its ever-strengthening currency. Now look at Zimbabwe's economy and its currency. Got it?
So the "quiet bailout" (aptly named by Setser) of the US economy by the import of Chinese money is fundamentally sound in itself, but it is also an artificial method of propping up a fundamentally weak economy. Look at the development of the USA's inflation rate, its unemployment rate, its weakening consumer spending figures etc etc (I haven't even mentioned housing, you'll note). It's a relatively strong move by the dollar for sure, but even though gold has tanked because of it, it's only really relatively strong to other currencies that are probably behind the loosening curve (e.g. Euro, GBP). Gold gets caught in the crossfire, and down she goes.
The other thing about this artificial USD propping method is that it threatens to nip the recovery in US exports in the bud. The current weak dollar is a reflection of the current weak US economy. However a weak currency is also part of the long term economic recovery of its country, as it allows the country to become competitive in world terms. In the long run, it's healthy for the USA (yeah, I know...in the long run we're all dead).
But when non-market forces (they usually go by the name 'politicians' who decide to get too Keynesian on the market) create their own imbalances, these in turn have to be corrected later. This is not YET the case with the current USD move, but it would become that if allowed to continue.
Therefore, I propose one of two scenarios:
- The current Chinese "quiet bailout" is only a temporary measure. Once it stops the real structural weakness of the US economy and therefore its currency will show through again, and the USD will drop.
- The current Chinese "quiet bailout" continues indefinitely and further strengthens the USD. This will be papering over the cracks, and as the cracks get wider, more paper will be needed until the whole new edifice collapses.
Either way, I'm not buying the US Dollar right now. The horse isn't pulling the cart yet, and the relative strength in the dollar isn't backed up by the basic things it needs to continue its march. All I see today is a successful short-term scalp of dollar bears, and not a recipe for long term country and currency strength in the USA.
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This article has 15 comments:
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User 244491
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27 Comments
Aug 18 08:28 AMThe question is not what one bought/sold it is question of stupidity,I suspect you belong to that category,the question is when you sold.
I could sell Boots and Coots Inc.(symbol WEL) that I bought for 6 cents I think in 1999 for 10$ 2 years later but I sold for 12 cents.
If you are long Gold at 415$ and didn't sell it at 900-1000$ then you are loser and big balls guys know about it,they will make you sell at a loss and then buy for themselves when pikers like you be bearish.
You wrote death penalty in this article for yourself,as you prove that you are a loser,now waiting for gold to go back to 1000$ as your greed tells you it is right place to sell but at 1000$ people like you become bulls again that's why your chances to bail out are slim.
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CLH
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717 Comments
Aug 18 09:01 AM-
Zooey
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786 Comments
Aug 18 11:47 AM-
JBP
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47 Comments
Aug 18 11:20 PMCommodities…Buy the Dips!
Commodities…Buy the Dips!
By James Rogers
The commodity bull market has a long way to go. This bull market is not magic. It's not some crazy "cycle theory" I have. It does not fall out of the sky. It's supply and demand. It's simple stuff.
In the 80s and 90s, when people were calling you to buy mutual fund and stocks, no one called to say. "Let's invest in a sugar plantation." No one called and said, "Let's invest in a lead mine." Commodities were in a bear market and in a bear markets people do not invest in productive capacity. They never have. Perhaps they should have, but they've never done it throughout history and probably never will. There has been only one lead mine opened in the world the last 25 years. There's been no major elephant oil fields [of more than a billion barrels] discovered in over 40 years.
Many of you were not even born the last time the world discovered a huge elephant oil field. Think about all the elephant fields in the world that you know about. Alaskan oil fields are in decline; Mexican oil fields are in rapid decline; the North Sea is in decline. The UK has been exporting oil for 27 years now. Within the decade, the UK is going to be a major importer of oil again. Indonesia is a member of OPEC. OPEC stands for the Organization of Petroleum Exporting Countries. Indonesia is going to get thrown out because they no longer export oil, they are now net importers of oil. Malaysia has been one of the great exporting countries in the world for decades. Within the decade, Malaysia is going to be importing oil. 10 years ago, China was one of the major exporters of oil, now they are the 2nd largest importer of oil in the world. Oil fields deplete, mines depletes. This is the way the world's been working for a few thousand years and it will always work this way. So supply has been going down for 25 years.
Meanwhile, you know what's happening to demand. Asia's been booming. There are three billion people in Asia. America's growing. Most of the world has been growing for the last 25 years. So supply has gone down and demand has gone up for 25 years. That's called a bull market.
One of the things you'll find if you go back and do your research is that whenever stocks have done well, such as the 1980s and 90s, commodities have done badly. But conversely, you find that whenever commodities have done well, such as the 1970s, stocks have done poorly. I have a theory as to why this always works, but it doesn't matter about my theory. The fact is that it always works this way and it's working this way now.
So before I set off to my second trip around the world, I came to the conclusion that the bear market in commodities was coming to and end. So I started a commodities index fund. [Editor's note: An ETN based on the Rogers International Commodity Index trades on the AMEX under the symbol: RJI.] This is an index fund. I do not manage it. It's a basket of commodities we put in the corner. If it goes up we make money; if it goes down we lose money. But since Aug 1st 1998, when the fund started, it is up 471%.
I [mention this index] to show you that the commodity bull market is not something that will happen someday. It's in process right now, and it's going to go on for years to come, because supply and demand are out of balance. And by the time we get to the end of the bull market, commodities will go through the roof. There will be setbacks along the way. I don't know when or why, but I know they are coming, cause markets always work that way. Commodities have done 15 times better than stocks in this decade and they're going to continue that [trend].
You remember my little girls. My 5-year old never owns stocks or bonds; she only owns commodities. She's very happy owning commodities. She doesn't care about stocks and bonds, but she knows about gold. I assure you, she knows about gold.
Some of you probably diversify, or believe in diversification. I do not diversify; I am not a fan of diversification. This is something that stockbrokers came up with to protect themselves. But you're not ever going to get rich diversifying. I assure you. But if you DO diversify, commodities are the best anchor because they are not going to do what the rest of your assets are going to do.
I will give you one brief case study about oil, because it's one of the most important commodities. Some of you know that oil in Saudi Arabia is owned by a company called ARAMCO. It was nationalized in the 70s. They threw out BP and Shell and Exxon. But the last Western company to leave did an audit [of Saudi oil reserves] and came to the conclusion that Saudi Arabia had 245 billion barrels of oil. Then in 1980, after 10 years, Saudi Arabia suddenly announced that it had 260 billion barrels of oil. Every year since 1988 – 20 years in a row - Saudi Arabia has announced, "We have 260 billion barrels of oil."
It is the damndest thing. 20 years; it never goes up; it never goes down, and they have produced 67 billion barrel of oil in this period of time. When nuts like me go to Saudi, we ask, "How can this be? How can it be that they always have 260 billion barrel of oil?" (By the way, last year they said they have 261 billion barrel of oil). And the Saudis say, "You either believe us or you don't," and that's the end of the conversation.
I have never been to the Saudi oil fields, and even if I had, I wouldn't know what I was looking at. But I do know something is wrong. I know that every oil country in the world has a reserve problem, except Saudi Arabia of course. I know that every oil company in the world has declining reserves. So I know that unless someone discovers a lot of oil quickly, the surprise to most people is going to be how high the price of oil stays and how high it goes eventually. That is the supply side. Let's look at the demand side.
The Indians use 120th as much oil as their neighbors in Japan and Korea use. The Chinese use 1/10th as much per capita. There's 2.3 billion people in India and China alone. Well, the Indians are going to get more electricity. The Indians are going to get motor scooters. They are going to start using more energy, so are the Chinese. But if the Indians just doubled the amount of oil used per capita, they would still use only 1/10th of what the Koreans use. If the Chinese doubled their oil use, they would still be using only 1/5th what the Japanese and the Koreans are using. So you can see what kind of pressures there are on the demand side for oil and energy, at a time of terrible stress on the supply side. These are simple things.
So I would urge you are to take a lesson from my little girls. My little girls are learning Chinese. My little girls are getting out of the US dollar. My little girls own a lot of commodities. I would urge you to do the same.
As always, be sure to do your own research to determine what best suits your goals and strategy. Whatever you choose, gold and currency diversification are a great place to start, so be sure to check 'em out.
Posted by Pipo at 6:55 AM 0 comments
Labels: jim rogers, jim rogers blog, jim rogers videos
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genco
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12 Comments
Aug 19 09:18 AM-
TonyC-SA
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39 Comments
Aug 19 09:32 AM-
CaptBob
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198 Comments
Aug 19 10:54 AMOur hollow shell of a dollar will take any help it can get, no matter how short term. Wait till it has to stand on it's own!! all the planets fiat currencies won't be able to afford a barrel of oil--or any other commodity!!.
We're not as bad as Zimbabwe, but we're too far gone down that same road to reverse course. Just a matter of time for the irreversible bite of inflation to really take hold.
I mean--Really!!!-did we think it would be different for us??--this time??.
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marxbites
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77 Comments
My Website
Aug 19 11:43 AMThis Thomas Edison Quote Sheds Light on the Money Scam in America. IOW's why they stole our real money.
In December 1921, the American industrialist Henry Ford and the inventor Thomas Edison visited the Muscle Shoals nitrate and water power projects near Florence, Alabama.
They used the opportunity to articulate at length upon their alternative money theories, which were published in 2 reports which appeared in The New York Times on December 4, 1921 and December 6, 1921.
Objecting to the fact that the Government planned, as usual, to raise the money by issuing bonds which would be bought by the banking and non-banking sector -- which would then have to be paid back with money raised from taxes, and with interest added -- they proposed instead that the Government simply create the currency it required and spend it into society through this public project.
This Thomas Edison quote made it plain in the following excerpt from The New York Times, December 6, 1921 issue ("Ford Sees Wealth In Muscle Shoals").
Here, the reporter reveals the Thomas Edison quote:
"That is to say, under the old way any time we wish to add to the national wealth we are compelled to add to the national debt."
"Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I, that for the loan of $30,000,000 of their own money the people of the United States should be compelled to pay $66,000,000 -- that is what it amounts to, with interest."
"People who will not turn a shovelful of dirt nor contribute a pound of material will collect more money from the United States than will the people who supply the material and do the work."
"That is the terrible thing about interest. In all our great bond issues the interest is always greater than the principal. All of the great public works cost more than twice the actual cost, on that account. Under the present system of doing business we simply add 120 to 150 per cent, to the stated cost."
"But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good."
"The difference between the bond and the bill is that the bond lets the money brokers collect twice the amount of the bond and an additional 20 per cent, whereas the currency pays nobody but those who directly contribute to Muscle Shoals in some useful way."
"... if the Government issues currency, it provides itself with enough money to increase the national wealth at Muscles Shoals without disturbing the business of the rest of the country. And in doing this it increases its income without adding a penny to its debt."
"It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people."
"If the currency issued by the Government were no good, then the bonds issued would be no good either. It is a terrible situation when the Government, to increase the national wealth, must go into debt and submit to ruinous interest charges at the hands of men who control the fictitious values of gold."
"Look at it another way. If the Government issues bonds, the brokers will sell them. The bonds will be negotiable; they will be considered as gilt edged paper. Why? Because the government is behind them, but who is behind the Government?"
"The people."
"Therefore it is the people who constitute the basis of Government credit. Why then cannot the people have the benefit of their own gilt-edged credit by receiving non-interest bearing currency on Muscle Shoals, instead of the bankers receiving the benefit of the people's credit in interest-bearing bonds?"
Rothschild Brothers of London communiqué to associates in New York June 25, 1863
"The few who understand the system, will either be so interested in its profits, or so dependent on its favors that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantages...will bear its burden without complaint, and perhaps without suspecting that the system is inimical to their best interests."
Russell Kirk, The Conservative Mind
When democracy turns, as it often does, into a corrupt plutocracy, both national decadence and social revolution are being prepared." So wrote the Irish-born historian, W. E. H. Lecky (1838–1903) in this devastating assault on mass democracy. Lecky spoke for the landed gentry and the upper middle classes of late Victorian England when he warned his countrymen that an unfettered democracy would destroy the balance of interests in the community and thereby undermine the Constitution." A tendency to democracy," said Lecky, "does not mean a tendency to parliamentary government, or even a tendency toward greater liberty." Indeed, the type of democracy emerging in Britain seemed to be the rudiment of socialism.
Curtis Dall, son-in law of Franklin Roosevelt wrote a book called FDR: My Exploited Father-in-Law in which he stated:
"For a long time I felt that FDR had developed many thoughts and ideas that were his own to benefit this country, the U.S.A. But he didn't. Most of his thoughts, his political 'ammunition' as it were, were carefully manufactured for him in advance by the CFR [Council on Foreign Relations] - One World Money Group. Brilliantly with great gusto, like a fine piece of artillery, he exploded that prepared 'ammunition' in the middle of an unsuspecting target, the American people--and thus paid off and retained his international political support."*
H. L. Mencken
Democracy is also a form of worship. It is the worship of Jackals by Jackasses.
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Rich in Bpt.
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6 Comments
Aug 19 01:02 PMFor CaptBob: Are you the same CaptBob who recently sent me an e-mail on the merits of spray painting?
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CaptBob
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198 Comments
Aug 19 03:27 PMOtherwise, do what you do best and Tom Sawyer it out.
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lonie
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71 Comments
Aug 20 12:03 AMGood comments by all and without a bunch of damned charts to confuse the issue.All seems to be just ( common sense).
Marxbites : Your articles submitted about what Edison and Ford said was classic.Thanks.
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Alex Stanczyk
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48 Comments
My Website
Aug 20 01:08 AMEconomy created by debt and inflation is not a strong economy, its smoke and mirrors.
Currency value is determined by how much it is, or is not debased, period.
Any idiot should be able to see this.
Can you buy more with $20 today than you can 100 years ago, or even 50 years ago?
Obviously not. Is GDP stronger today than it was then? Some would argue it is.
Why then, can you not buy more with todays dollars?
Sometimes I think economists and financial analysts are so busy trying to be intelligent, that they are some of the stupidest people on the planet.
www.rapidtrends.com/bl.../
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silveraxis
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63 Comments
My Website
Aug 20 01:56 AM-
The hand
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787 Comments
My Website
Aug 20 04:29 AMotto, why is gold even mentioned in this article? is it implied i should be investing in gold while it is going down and avoid the dollar while it is going up? hello....i sold out of gold when it no longer was going up, and i sold out of equities when they started going down. everything is cyclic.
falling commodity prices are the early signs of a recession. the length of a recession is indeterminate. rising commodity prices signal the beginning of the end of a recession. yes gold will rise again and i predict to new heights.
if everyone would just open their eyes they should see that things are not acting as predicted. forget the conspiracy which is out to squash the value of gold. markets are manipulated. what is - is. when gold goes up, buy it. when it stop going up, sell it. it will cycle many times in your lifetime.
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User 221215
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2 Comments
Aug 20 08:01 AM