"It is a measure of the depth to which rational economic and/or financial analysis has fallen in Washington DC that those who are ramping up the issuance of new credit Dollars refuse to even contemplate any possible adverse effects of their actions. At least, if they do contemplate any, they are sure as hell not talking about them.
(Gold Last Week - April 25)
No, we haven't heard anybody from Washington DC talking about the "strong Dollar policy" this week either. Pretty hard to do, when the $US index has just hit a new 2003 low and confirmed the next leg of its BEAR MARKET. It would seem that outside Washington, at least on Wall Street, few are contemplating any "adverse effects" either, not yet anyway. The Dow just enjoyed its third rising week in a row and has now set a new high in its Iraqi war rally. This week, the post-war rally sent the Dow to 8582 - its highest level since January 20.
There are two schools of thought at present which "explain" the remarkable savoire faire being exhibited by US investors in the face of what is fast becoming a $US meltdown. One is, of course, the argument that the lower Dollar is good for US business because it makes what the US produces more competitive on world markets. The other, coming from the forex markets, is that the big houses on Wall St are not losing money on the fall in the $US anyway because they are indulging in what could be called a "reverse carry trade" operation. They are borrowing $US, at low interest rates, and using the proceeds to buy other currencies which offer them a higher yield (like Euros, and Aussie and Canadian Dollars for example).
No one inside the US professes the least concern about the REASONS for the fall in the $US. One reason is the increasingly grim economic picture being painted by US economic statistics. Another is the increasing concern being felt and now in some cases ACTED UPON by foreign investors faced with the loss of value of the (at least) $US 8 TRILLION they hold in US assets - all denominated in $US of course.
The other reason is NEVER mentioned in polite company, inside or outside Washington DC. This reason is the rampant deficit spending of the Bush Administration. This is now getting even more serious, on two fronts.
First, the Senate is now looking at ways to shore up the HUGE budget deficits being faced by the states. By law, US states CANNOT run budget deficits. Collectively, they face $US 120 billion plus of budget shortfalls. They can make these deficits up by cutting spending, but raising taxes, or by a combination of the two. Much better, say almost all Democratic Senators and an increasing number of Republicans, to dip into (reduce) Mr Bush's cherished "tax cuts" to tide the states over, at least for a while. After all, if the States have to tax to fund their shortfalls, the tax increases involved will more than wipe out Mr Bush's cherished federal tax cuts.
The other problem with the Bush Administration's deficit spending is that the US Treasury is not yet out of the woods regarding their legal ability to borrow money. The 2004 budget, complete with debt limit increase, was passed before the April 11 Congressional recess by the House of Reps, but it was NOT passed by the Senate. Now, the Treasury is warning the Senate that it must be passed soon, because the Treasury may run out of borrowing ability under the present $US 6.4 TRILLION debt limit by "mid May" and WILL run out by the end of this month.
The House, as part of the passage of the 2004 budget on April 11, voted to raise the debt limit to what is now being reported as $US 7.38 TRILLION. That would be an increase of $US 980 Billion. The Senate must vote on this, and they are presently wrangling over the size and composition of Mr Bush's tax cuts.
As you know, the amount of debt admitted to by the Treasury has been frozen at $US 6.399975 TRILLION ($US 25 million below the debt limit) since February 20. As part of the 2004 budget passed by the House of Reps on April 11, there were official estimates of cumulative deficits of just over $US 1 TRILLION by 2005. As all foreign (and many American) investors know, "official" estimates routinely fall grotesquely short of the actual figures.
The problem, as analysed in the current issue of The Privateer (#474 - published on April 27) is that despite the fact that the US is totally dependent upon continuing foreign investment for its economic health, the Bush Administration firmly clings to a policy of unilateral decision making. To them, the function of the rest of the world is simply to keep sending the money and to fall in line in all other respects. This is a policy which cannot work, and as the fall in the $US is starting to illustrate most alarmingly, it is not working.
Thus, we have a "surreal" situation. The US, by its words and its actions, professes to be totally unconcerned about their weakening currency. The rest of the world, by their words and now, ominously, by their actions, is getting increasingly concerned about losing their shirts as the $US falls. Once the Senate confirms the debt ceiling hike, the Bush plans for rampant deficits will be confirmed. The rest of the world will see the present situation as stretching into the indefinite future with no hope of a reprieve.
Remember, many nations, including Canada which has seen its currency reach five year highs this week, have recently been RAISING their interest rates in acknowledgement of their own domestic economic situation. The FOMC meets on May 6, and there is NO prospect of a hike in US rates. Treasury yields have recently been hitting new 40 year plus lows, further eroding the yield available from debt instruments in a currency which is firmly on the slide. Even US stock markets have seen their recent gains eroded badly in terms of foreign currencies by the fall in the Dollar itself.
The Dollar is falling. US interest rates are NOT rising. US stock markets are STILL rising. And yes, Gold is rising too - BUT ONLY AGAINST THE DOLLAR. There are often "bizarre" financial occurences at the end of a war. American investors have had a psychological "shot in the arm". Foreign investors, even those who are greatly concerned about the Dollar, still look on the US as a "safe" place for their wealth and at the US government as being a very dangerous entity to "cross".
Technically, the $US index has once more CONFIRMED its post January 2002 BEAR MARKET by hitting new 2003 lows this week. $US Gold is recovering from its $US 321 lows of almost a month ago. But as yet, $US Gold has only regained just over one-third of its February/April losses and is still below the level at which it began 2003. In $US terms, the Gold BULL MARKET is still perfectly intact, but while the $US is showing GRAVE weakness, Gold has yet to show any real return to strength.
It goes almost without saying that there is and will continue to be a concerted effort to prevent that strength from reappearing as it did in December 2002 - January 2003. But with the $US now having nowhere to go but DOWN, any and all efforts in this direction are ultimately doomed to fail. Gold has hardly moved yet in terms of most other major currencies, it is moving extremely sluggishly, given the circumstances, in terms of US Dollars.
What we are looking at here is an excellent "buying opportunity" for Gold in terms of the currencies against which it has yet to recover, and a very good "buying opportunity" for Gold in terms of $US. The correction has found solid support globally, and has started to reverse in $US terms. Potentially, and especially given the MUCH WORSE fiscal US situation, Gold now offers the same opportunities it did last November just before the price ran up from below $US 320 to almost $US 380.
The $US is going down - it is inevitable that Gold will go up.