Or - It had BETTER stay "strong" - nothing else is!
It seems amazing now, but it is true that at the start of the year, there was widespread and global trepidation over whether the new Bush Administration would continue with their predecessor's "strong Dollar policy". Some imprecise remarks from new Treasurer O'Neill made at the first G-7 meeting he attended gave rise to these worries. "Good heavens", the world gasped, "what if he wants a WEAK Dollar??"
Of course, Mr O'Neill never said anything at all about a "weak" Dollar policy. He merely voiced the reasonable opinion that a strong currency was the RESULT of good economic policy, not the CAUSE of it. But this was "interpreted", and the result was widespread conjecture that the new Bush Administration was not going to be as active in their massaging of the U.S. economy (and market when required) as their predecessors had been.
Looking at the Dollar now, the fact that anyone was concerned about its strength only three months ago seems grotesque. The US Dollar Index closed on March 30 at 117.63, less than a point below its 2000 multi-year high of 118.45. On the surface, the Dollar looks stronger than ever.
But BELOW the surface, all the economic weaknesses of the world in general and the U.S. in particular remain fully intact. Worse, the crash stop of world economic "growth" which is now becoming very difficult to ignore brings the danger from these weaknesses closer and closer. In the U.S., and everywhere else, "wealth" has crashed, but debt levels have NOT. The U.S. is still relying on an avalanche of foreign capital, and it is still getting it. This week, as the Dollar continued to rise, U.S. stock markets recovered slightly. The Dow still remains below 10000, but it is still not in a bear market on Wall Street's terms. Hope springs eternal. And with it comes the most amazing convolutions in economic "reasoning", convolutions that even J.M. Keynes would not have tried, knowing that he could not get away with them.
It is now gospel that the lower a nation cuts its interest rates, the more attractive its currency will become. "Let's all cut to ZERO and have done with it!". When consumer confidence is expected to be down, thats "good" because it'll give the Fed a reason to cut rates again. When consumer confidence is found to be UP, that's "good" because the U.S. is about to start "growing" again. We here at The Privateer are fully confident that all consumers would love to spend as much as they can. Only one problem, what happens when the debts have to be paid?
We are now in a surreal economic interlude. The Dollar is soaring. Stock markets are threatening meltdown. Layoffs, horrendous profit results, and bankruptcies are sprouting like weeds. And Gold? Well, in $US terms, it is again languishing just above its 2001 lows, and only a few Dollars above its 1999 lows.
The term "bubble" is a useful one in financial analysis, referring as it does to any market which has seen prices blown up to disproportionate levels. But, in this context, what is the opposite of a "bubble"? We don't know of a convenient word to use, but if one wants to describe the present $US Gold "price", that is what we are seeing. How about an "elbbub"? Kinda catchy - don't you think?
A "bubble" has nowhere to go but DOWN. An "elbbub" has nowhere to go but UP. Just as the Dow has had a 10000 floor for two years, so Gold has had a $US 250 floor. Gold has refused to break below its floor, but it is still a long way below its post November 1997 "ceiling" of $US 300.
Gold is flat or UP in terms of all four "foreign" currencies we cover this week. That's how rampant the Dollar has been. If you think that the amazing "chop-logic" which is now passing for economic reasoning and financial analysis can go on forever, then you have nothing to worry about. If you think that reality is something that cannot be escaped from, and the harder one tries, the closer the day of reckoning gets, then you DO have something to be worried about.
A little over a year ago, the Nasdaq was a "bubble". Now, the Dollar is a "bubble". ALL BUBBLES BURST. It's just a question of time. No one can go on pretending that up is down and hot is cold and wet is dry forever. The Marxists tried that - you know: "Thesis - Antithesis - Synthesis". It didn't work for them and it won't work for financial and currency markets either.
"We have said this before, the U.S. Dollar and Gold cannot co-exist - AS MONEY. That was proved in the 1930s, and in the 1960s and 1970s too. The great GOLD holding down operation which has hit warp speed since 1996 is building to a crescendo. And right now, there is no way of knowing whether the final trumpet will be a Gold Dive and a Dollar explosion, followed by a fantastic reversal, or whether Gold will hold its recent lows and start to rise more sedately again."
(GTW - March 16)
The Dollar is rising even faster. Gold in Dollar terms is falling by inches, but creeping inexorably closer to its major support in the mid-low $US 250s. We await the Dollar action next week. As earlier stated, the 2000 multi-year high (close) on the U.S. Dollar index was 118.45. The Dollar index is now (March 30) 117.63. Let's see what happens. Will the Dollar stall at its old highs (and Gold at or near its old lows), or will the Dollar break through? If it does, we have a truly unprecedented situation - a currency running rampant while the nation which produces it sees its internal and external debts continue to climb and its domestic asset valuations continue to fall.
Reality cannot be ignored forever, but it can be ignored for sometimes astonishing lengths of time. When it is, the end consequences are always much worse than they could have been, and should have been. We'll see.
