The US Dollar and Gold in relationship to the Hui and currencies
By Duncan Cameron

Huge debate rages over the question as the old pop song goes “I cant live if living is without you” for China and its surplus dollars as to whether it will be invested into the US verses the US is a dog with fleas gasping out it’s last woof’s and ready for a horrendous drop in the dollar index when no one will loan it money any more.

For us as kiwi’s our currency has been the darling of speculators for its best returns in the OECD in what is considered a stable economy. Like our flightless bird called the kiwi, the national symbol is now looking decidedly like its ugly cousins  and is the fifth-worst of the 30 OECD countries, after Iceland (they are back out fishing for food ), which is forecast to have a deficit equal to 24 per cent of GDP for the 2008 year, Greece (Kids sell rocks to people in the streets so they can throw something through the banks windows) 14.5 per cent, Portugal 10.9 per cent and Spain 9.7 per cent (the last 2, they get too much sun, maybe if they wore hats more they would get it)

Why use the Kiwi and refer to the current account deficit as an indicator? Simple really! It’s an excellent gauge when you look at how a nation is faring and where it might be heading in terms of prosperity! The United States’ current account deficit was forecast to be 4.9 per cent of GDP for 2008 but save your bubbly, the fat lady is back at her hotel waiting for a taxi to the opera house much less getting ready to sing.

I could choose any currency but our one is a good one to demonstrate extremes. It was a clear fine day back in March 16th of 2008 when on Monday morning I was yelling at my trading screen futilely I might say, as with every Monday morning in a nation first to see the sun in the world but powerless to take advantage of some hot up action. Alas the gold market was not trading but its price in the back market bidding was on the move up, up and away because as we all know this was the morning of Bears Sterns. “Bear” as in the name came to signify what happens when you get a crash. Maybe they should have called it “Bull Sterns” and we could have avoided all this, just joking!

Historians looking back in years ahead will note that day as it set off dominos falling one by one in the months ahead culminating in global chaos on all markets. At the same time we watched the US dollar stage a “Lazarus” rally that any disciple would be proud of until histories equally ironic repeat of the great crashes 1873 and 1929 – Oct/November lows saw equity markets turning although the jury is out as to if its over or not.

You Don’t need to have studied math’s graph interpretation papers at class to get the gist of the price of gold hitting all time highs precisely the day that currencies all over the world began to turn green with desire as in desire US dollars and of course a turn in gold to the downside precisely at the same time.

Anyone doubting the relationship of the dollar which is acknowledged as the world’s reserve currency and its counter to gold is surely missing a fundamental fact. “Gold is money and when the US dollar has confidence in it as a store of wealth then gold does poorly and when it gets weak gold prospers”

Equities – The Hui

So we move to Gold stocks and in particular the Hui which tracks the top bundle of un hedged gold stocks. In theory if gold is doing well, the benefits flow trough immediately into the Hui as they are not beholden to financiers in order to reap the price benefit of gold’s climb but like gold itself the Hui has been victim to the almighty dollar so its an easy overlay to drop the same dates and turning points on a popular spec currency like the Kiwi or gold or the US dollar index for that matter to gauge entry and exit of the Hui and gold related stocks. The dates are the same.

What to do?

(A) The worlds reserve currency is the US dollar and if it’s weak, gold is strong and nothing regards short selling / manipulation/ shortages etc etc can crush the unrelenting pressure of what happens to gold when the US dollar declines. Even my 2.5 year old boy understands what happens when he tries and builds a wall of sand as barrier against the tide.

(B) Like the opening statement in which I sing “cant live if living is without you” that debate of whether the US dollar will decline in 2009 or in years future is open for huge argument but if money becomes worthless through too much printing of currency un backed by real GDP, then conditions ferment perfectly for a currency crisis. The US has said openly they will print as hard as they can and worry about its effects later. That is a recipe for disaster and perfect for gold but as to timing who can say when monetary cancer will break out all over the body as symptoms of a deadly disease within the body.

(C) The Americans are not the only nation that have said they will do likewise and worry about inflation later, The British and all other indebted nations needing blood infusion are doing the same. History is brutal to such no matter how great the empire whether the Romans millennia ago or the French just a few hundred years ago when it comes to money printing.

(D) If the US dollar for some miraculous reason strengthens then Gold / the Hui and all related gold stocks will suffer as gold being money will be spurned in favor of dollars. If that happens BUY, BUY, BUY gold and gold stocks as opportunities like that need to be pounced on given point (A)! Even right now that opportunity still exists given the graphs!

(E) Every central/reserve bank in the world is racing to make % rates offered as close to zero as possible and with that destroying savers hard earned deposits, the lifeblood of investment money back into any economy that operates in balance. Yes you can stay awake longer on drug prescriptions or uppers in an attempt to monetarily stimulate an economy un backed by any real GDP but see what a person looks like on no sleep and ask yourself if that is sustainable. Many nations have tried it and we have recent examples of Zimbabwe or Argentina to look at what happens when you just print money and so the question of who does it get handed to is immaterial.

Speaking of

(F) Don’t be fooled by pork barrel projects either. They have tried harnessing excessive printed money before into public works projects. Most often it just ends in a lot of people running around looking busy. Having started my working life of many years ago in a government department, I am sure you all know what I mean but if not, trust me, looking busy and accomplishing nothing is an art honed to the sharpest point when sucking on the tax payers tit.

(G) Gold on the 16/3/2008 was $1000 give or take and the US dollar index was floundering at 72 down from its mighty days of 120 some 8 years earlier when gold languished at $250. Today the US dollar index is a far healthier at 82, not 72 (that’s colloquial for heart beat but still comatose on the operating table) and yet we are only $150.00 off that $1000 high.

What synaptic jump needs to happen in investors heads to just get it? For most Americans as frogs being boiled slowly to death, someone needs to tell them that gold is not bling but make no mistake, the day they wake up and realize it, look out gold world. The word “shortage” will attain a fresh definition when compared to shortages of supply reported today.

Final thoughts as we enter 2009

I received a question a year or so ago asking why should gold given all its misery and difficulty to extract be the basis of sound money, why cant we run a digital balance sheet. Another asked the same and saved a picture from a magazine carefully folded and sent back to me for perusal. Its image showed the appalling misery of children yoked into an industry as one of the more somber pictures of what most only see in machine automated processes to deliver gold to market.

I can neither argue or choose to even stand up for gold as such being the best instrument regards “money” but I do note that in all of history “virtue” to thy neighbor, whether family, stranger or nation is for the most part dominated by the interests of self. Gold has always served as the ultimate tutor to monetary waywardness and it is simply a matter of where in history are you positioned when the natural cycle repeats.  If you cannot see you are in a cycle change, you are in the words of Forest Gump “Stupid as, stupid does” and even the simple minded having invested in Gold will make mockers of the wisdom financial gurus who want to stand by and hurl derision at any investing in gold.

Disclosure ; Duncan Cameron is an affiliate of “Anglo Far-East” and endorses bullion holdings on your person mixed with international diversification via this company that has rigorous 3rd party auditing procedures to verify clients holdings. Whilst I trade, make no mistake, trading is a pastime that can never replace core bullion holdings.

http://www.anglofareast.com/broker/dc-001

This entry was posted on Friday, January 16th, 2009 at 12:25 pm and is filed under Archived. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.