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Disconnect!Frank Lechner  It has been some time since I last chimed in with a thought or two. One thing that occurred to me, was the vast amount of emphasis put on the dollar exchange rate vs other world currencies, and how it reflects in Gold and Silver pricing. While this has been true, as gold and silver have climbed from the cellar of decades old lows, going forward this may indeed not be the case. It is my argument that the dollar vs gold symbiotic relationship of the most recent past, ie the dollar goes down against other currencies = gold up in dollar terms, will have to DISCONNECT for the precious metals markets to really get rolling. While the dollar has had a very strong decline in real terms, of about 125 to 84 on the dollar index, or about 33%, gold has moved up in dollar basis from about 260 to 425, a gain of 63%. This dollar decline has been very significant, and yet, the whole time this decline has been 'managed' to these lower levels. The decline has not been panic driven as many have speculated, nor has it been overly dramatic. Many seem to be waiting for the panic driven excess liquidation to a bottom heretofore unseen. Don't hold your breath. There are many players in this little game of currencies, and the most recent bear in the dollar has created winners and losers. An example of a loser would be the South African stocks and the beating they have been taking as the Rand climbed ever higher against the dollar, in effect vaporizing all of the inherent value created as the dollar gold price has risen. A subject for another day..... confiscation of gold through currency manipulation. An example of a winner would be the Eurozone, as the Zero has risen mightily whilst the dollar declines. Foreseen or unforeseen circumstance (dependent on your point of view) in this is that the gold price in Euro terms really hasn't shown the bull market in gold such as that here with the buck. As we move on through this shell game though, the US continues to print fiat at exponetial rates, and the challenge is, and will be, the ability to find someone to take this fiat from them. This monetary expansion has exceeded the demand for the US currency, hence the reasoning for the rising interest rates. This is the enticement for investors to continue to accumulate US dollars, in lieu of other pertinent investments. The interest rates here will have to be greater than those offered elsewhere, in order to maintain the absorbtion rate of newly created monetary fluid. Let's add to this discussion the motives and machinations of others, for instance, Euro zone leaders crying continuously about the dollar decreasing too rapidly, thereby hurting their competitive position (as if they had any anyway). Workers putting in 30 hour weeks with extended comparable 'holidays', cannot compete with workers grinding out 40, 50. 60 hour work weeks, with minimal downtime for vacation. In the same vein, US workers cannot compete on a real basis with some of our Asian partners in world commerce, for the very same reasons, output cost per man hour. Darn, another subject for yet another day. Point being, is that the dollar decline has brought some interesting dynamics to the table, effectively putting a floor under the decline, and preventing an all out collapse. Other competing currencies have played this game quite extensively. They are also printing and primping their colored paper. Other currencies are dressed up for the 'currency ball' in full regalia. The competition is who can dump the most of this worthless junk on the world markets. The dollar will be allowed to stabilize, and even rise moderately, for the time being, provided the proper inducements are brought to bear. This will temper some of the regional discrepancies and disputes, in addition, it will buy time to continue the paper chase. What does this mean for gold and silver investors? Simply, let's flip a coin "Heads I Win, Tails I Win!". As the interest rates rise in the US, and the Fed continues to talk of the inflation genie coming out of the bottle, the demand for gold and silver investments will again increase, much like that of the 70's. If the worst should come to pass, ie a dollar collapse, gold and silver are still going to be the place to be. I think we are closer to a realized 70's scenario at this time, than the coming deflationary collapse. That dessert will be served at a later date, although not excessively far in the future. The collapse will be the culmination of this whole incredible run of the fiat monetary express. This contrived and controlled monetary expansion has been very methodical, and direct, until the most recent few years. The expansion has surpassed trend, moving virtually parabolic. This fiat creation, as I have stated many times in the past, had to manifest itself within and throughout the economy. Thus the reasoning behind the rising oil, home, real estate, corn, wheat, soybeans, coffee, etc, etc, etc prices. The fiat is parking itself in the values of items we use and abuse each and every day. Because of this, the prices for these items will continue to rise, and the lowest levels of their most recent bear markets, will not be seen again until the ultimate deflationary collapse. Many products have risen sharply in dollar terms, such as copper and oil, yet there are many others that are just starting to get rolling. This pricing expansion will continue until it has nowhere to go. By that I mean, prices in corn will be unheard of, prices of a loaf of bread will be comparably difficult to digest, no pun intended, and you will think a gallon of gas must be golden. This is the main reasoning behind the statement that the dollar index and gold will disconnect from each other one day, or the dollar will be somewhat stable, while gold motors on to ever higher ground. The dollar will have its' own battles to fight, while gold will take the rightful place of hedge against all of the above. Gold can and will continue to push to new all time highs over time, while the dollar will eventually find its' true place on the trash heap of history. It has already been proven with the relative difference between dollar decline percentage and gold gain percentage. This disparity will increase accordingly, it is just a question of when. Our key as investors, is to look for the clues that help us to realize when the disconnect is happening. That will usher in the next phase of this gold bull market, or the acceleration phase. (I told friends to buy coffee and beans last year, did you???)(Opportunity is all around, you just have to be willing to take advantage of it WITHOUT EXCESSIVE SPECULATION.) All Aboard!! April 01, 2005 Frank A Lechner
is a private investor, and makes no allowances for stupidity
or insanity as each chooses his own investment battles. Past
performance is no indication of future direction, nor do I even
care about govt mandated disclosures. You make your choices and
you live with them. He does in fact believe that we are indeed
in a time of turmoil, a time of increasing prices, much as wrote
about before, and that this period will resemble the 70's. Those
that fail to learn from history are destined to repeat, or so
I hear. Good investing to you. |
