THE VALUE
VIEW GOLD REPORT
MONEYization
#4
Ned W. Schmidt, CFA, CEBS
December 10, 2004
Moneyization:
The global financial phenomenon of individuals and businesses
moving their funds to monies in which they have the highest confidence,
or money which has a higher store of faith.
Monetary complacency is clearly
not the norm, as evidenced by the recent collapse of the U.S.
dollar. Clearly, some around the world are moving to monies in
which they have a higher store of faith. Having been one of the
bears on the U.S. dollar for some time, the current circumstances
do not come as a surprise. With Gold recently reaching a new
cyclical high, the champagne corks popping can be heard in the
background of the e-mails we read. However, certain perspective
and coolness of thought must be retained. Breakfast has different
meaning to the chicken and the pig. Questions and consideration
on which to reflect:
 Will central
banks readily surrender to the fall of the dollar?
Has the dollar fallen too far too fast despite the
long-term bear market?
Is the dollar the only currency falling in value?
Is my home currency at risk also?
Should I be buying Gold or retaining my home currency?
Has the bear market for the dollar really started?
How does the dollar's bear market end?
In money, survival of the
fittest will indeed be the rule.
But, governments do not surrender readily or easily.
The first question deals with
whether or not the central banks around the world will react
or respond to the dollar's recent depreciation. A lot of words
have been wasted on the question of the dollar's fundamentals.
Most of those positive utterances were essentially nonsense,
as the dollar 's fundamentals are just simply rotten. The simple
fact is that too many dollar assets are held around the world.
Every central bank around the world has got dollar assets stacked
in the closets, in the basements, or anywhere else they can find
room.
Markets in recent times have
had a tendency to move to an extreme. The current euphoria on
the NASDAQ and the recent experience in oil are fairly obvious
examples of market extremism. Oil prices one month are in the
mid-fifties and the next in the lower forties, as an example.
A subtle, and probably irrelevant, change in news on oil inventories,
caused a dramatic shift in the price of oil. Similar events could
unfold in the market for dollars.
Many times investors want reasons
for a market acting in a certain way. Some fundamental related
to the real world, they believe, must be driving what is happening
in the market. Often the real fundamentals are just the movement
of money into and out of a sector of the markets. Oil went to
an extreme simply cause too much money followed the signs of
positive momentum. In hindsight, no fundamentals were driving
the price of oil to the recent peak. The sell off of oil was
simply that money moving back out of that market. Money moving
is a fundamental of a market, but not the kind of factual fundamentals
so many seek.
The recent collapse of the
U.S. dollar's value is related to money movement. Have the fundamentals
of the U.S. dollar really changed in the past few weeks? More
likely is that the dollar's fall is simply related to money movements
in the market. That "sell the dollar" attitude has
pushed the level to roughly the equivalent of $55 oil a few weeks
back. Oil may go higher in the long run and the dollar will no
doubt also go lower in the long run. But, the recent action in
the dollar appears more like an over sold condition brought on
by excessive short-term speculation.
Neither the Federal Reserve
nor the European Central Banks seem prone to intervention. Philosophically,
both institutions do not seem inclined to actually interfere
with market action. About the time the screams to do something
are the loudest is when the dollar market will turn. Nothing
was done when electricity prices skyrocketed upward in California,
and down the price came. Oil is the most recent action. Unless
some tangible event can be identified neither central bank will
intervene. Rather, they will just let this recent market run
exhaust itself. Do note that such an attitude is what insures
the long-term bear market for the dollar remains intact.
Next week the Federal Reserve
meets. Given that the ECB did not raise rates, the Fed's actions
will signal the seriousness of their attitude toward the dollar's
problems. A rate increase of 25 basis points would mean the U.S.
will not take action to support the dollar. The rate increase
must be 50 basis points, or more, to suggest that action is being
taken to support the dollar. 25 basis points, or less, is a signal
that selling the dollar is still the wisest long-term strategy.
Governments are not done supporting
the dollar, as buying of dollar debt continues. Though we will
see later the enthusiasm may be waning. Chart One portrays the
holdings of U.S. government and agency debt by official institutions
at the Federal Reserve. These central banks have not yet ceased
to accumulate dollar denominated assets. Lately the accumulation
actually rose as more dollars were retained by these institutions.
Some central bankers may be
nervous. They may be in the press screaming for the U.S. to do
something. But, their jobs are important to them and most would
not actually care to work for a livelihood. For political reasons,
central banks are not joining in on the dollar selling. Try to
imagine a central banker, owning billions of dollar debt, willingly
taking an action to destroy part of the value of those investments.
Taking a look at other statistics
will not identify widespread dollar fear. Selling of the dollar
by the broad, global public does not seem widespread. U.S. monetary
statistics do not indicate yet any wide move out of the dollars.
At some point boxes of dollars will start appearing on planes
returning to Washington, but that does not yet appear to be happening.
Wide spread selling will occur, just not yet.
The negative short-term sentiment
will run till exhausted. Recent action suggests that this sour,
short-term mood is starting to wane. Many funds and traders would
like to take profits. December is now in its second week. These
groups do not like to work hard or risk profits in the latter
part of December. These pseudo dollar bears are likely to book
some profits.
Do not be surprised by a quick,
sharp rally for the dollar. Such a move would be consistent with
a bear market pattern. Rallies in a bear market are upward thrusts,
followed by long, slow declines. At the present time, the psychology
on the dollar and God, while right in the long-term, is at an
extreme for today, and excessive. A bear market rally for
the dollar grows increasingly likely.
Gold, reflecting the excessive
market mood for the dollar, has been over bought . Short-term
enthusiasm is too high. A correction for Gold is due. While many
realize that, they refuse to admit to the possibility. Gold is
vulnerable in the short-term to below $410 and Silver to $7.
While a correction will frustrate some, long-term investors will
use these lower prices as buying opportunities.
Many investors, rather than
simply focusing on the dollar problems and Gold's move, should
be paying more attention to their individual situation and national
money. In previous articles the Gold price of national monies
has been discussed. Readers unfamiliar with this work should
review them in the archives of one of the popular Gold web sites.
The reason for focusing on
the Gold price of national monies is that this approach helps
to understand the true movement in a national money. Your national
money may be going up versus the dollar, but losing value versus
Gold. Chart Two plots the recent trend of some important national
monies. In terms of Gold, none have been gaining value regardless
of what they have done against the dollar. Attention should be
focused on the true value of your money, not the dollar value.
As is apparent from the graph, none of the four major currencies
plotted have a positive trend in terms of Gold.
The following table helps further
to understand the trend for the true value of national monies.
Only one, South Africa, of the eight national monies has been
experiencing a rising Gold value. Yes, the U.S. dollar may have
been the worst performer. Note though that the rest are also
losing value versus Gold. The point? Each investor needs to assess
the true fundamentals of their own national money. Should the
investor own gold or their national money? What your national
money is doing versus the dollar is interesting but not the critical
issue.
Arrows indicate trend for national money, and number is ranking
of country.
This work on the Gold price
of national monies is beginning to produce some interesting results,
which will begin appearing in the monthly newsletter in December.
Such measurements can be used to determine, for example, if a
Russian investors should buy Gold. Today the answer is that a
Russian investor should not be moving into Gold. The South African
money has the same evaluation, but nervousness on that opinion
is extremely high. UK investors are in the reverse situation.
UK based investors should be converting pounds into ounces by
buying Gold.
Each national money has an
individual situation versus Gold at any one time. Each individual
investor needs to be deciding on the wisdom of holding the money
or buying Gold. Learning to think and work in the Gold price
of national monies will help you do that. Focus not simply on
the dollar's action, but the appropriate buy/hold/sell decision
on Gold from the perspective of your own national money.
We need to return to our final
questions. Has the bear market started for the U.S. dollar? Of
course the answer is yes. In fact, it started two years ago.
Only recently has this condition become popular.
The important point is that
the U.S. dollar is somewhere between the start and the end of
a bear market. Regrettably, today is far closer to the beginning
than the end. The deterioration in the value of t he dollar has
not yet caused either major panic, major selling, or a major
change in the U.S. economic situation.
The dollar's bear market end
will be identified by two conditions. Chart Three will identify
the first of those conditions. Foreign official institutions
remain net buyers of U.S. dollar debt as shown in that graph.
When that graph shows serious and prolonged net selling by these
institutions, the first condition for the end of the dollar's
bear market will have arrived. That selling will be contrary
indicator, kind of like when the UK sold Gold, and probably bought
some U.S. debt.
The second condition is U.S.
interest rates. At the end of the bear market for the dollar,
U.S. interest rates will be well into double digits. A prime
rate in the 20-30% range is certainly likely. Trying to sell
a home will be only slightly easier than selling season tickets
to the Miami Dolphins at the present time. Capital controls will
be widespread, and U.S. citizens will be restricted on moving
money out of the country. Rather than confiscate your Gold, a
more likely event will be an exchange of "new" U.S.
money for "old" U.S. money with serious limitations.
No one ever contended the road
to US$1,300 Gold would be a fun one. Also, no one ever said it
would be a straight road. Rallies and corrections are the patterns
that come together to create a market move. Be selective in the
timing of your Gold purchases. If you ever hear yourself saying
that you must buy today cause the market is getting away from
you, stand up and turn off your computer. And finally, each individual
investor needs to assess the situation for their own national
money versus Gold. Do not take comfort in the fact that you do
not own U.S. dollars for in reality your money may also be depreciating
versus Gold.
Ned W. Schmidt
 Ned W. Schmidt, CFA, CEBS is publisher
of THE VALUE VIEW GOLD REPORT. That report now includes
a weekly message, TRADING THOUGHTS, to help investors identify
timely points for buying Gold and Silver.
You can join him for the Gold Super Cycle here.
His monumental report, "$1,265 GOLD," with 255
pages and 98 graphs, is now widely known, and is available at
www.amazon.com
or from the author.
This work has now been read by investors in over twelve countries.
Ned welcomes your comments and questions. His mission in life
is to rescue investors from the abyss of financial assets and
the coming collapse of the U.S. dollar. He can be contacted at
nwschmidt@earthlink.net.
Copyright ©2004 Ned W.
Schmidt. All Rights Reserved.
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321gold Inc
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