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With the US dollar in the dumps and the price of gold dancing around $650 an ounce, bugs are no doubt wondering if the much anticipated U.S. dollar crisis has arrived. If it has $750 an ounce could come quickly, $850 an ounce even faster, and, finally, quadruple digit gold!....
Despite the headlines suggesting as much, last week was not a ‘panic’ – or a run out of the dollar. How can I be so sure? Because no U.S. policy maker said anything to try and stem the dollar’s slide. In fact, save a plea from France, no other central bank or foreign policy maker hit any major alarm bells last week. In other words, a weakening USD is something the world is dealing with, at least for the moment.
With gold unable to skyrocket last week, gold-bugs naturally conclude that USD weakness will intensify during the seasonally weak (for USD) month of December and that gold will skyrocket soon. Refusing to join in this chant, I will say that forecasting short-term movements in currencies is next to impossible to do.
Subdued Bullishness
I still own precious metals, and will probably continue to own precious metals until USD hegemony is severely tested. However, what I will not do is pound a drum and tell others to load up on gold. Rather, the time to buy gold was when the BOE gold auction was oversubscribed and/or when central banks announced an agreement to limit gold sales in the future - that was 7-years ago! Why was gold a quality long-term investment 7-years ago (and also during the 01/02 correction)? Because if you had mentioned a gold ETF or speculated that producers would stop hedging forward production when gold was hovering above $250 an ounce you would have been locked up. Today it is the mainstream that is touting an imminent record rally in gold. If you do not see the contrast and realize there is potentially great risk in owning gold today you are not looking hard enough.
Gun to my head: Part of the reason why I can’t bring myself to sell all my precious metals is that there is so few attractive investment alternatives. Another reason is that the ‘imbalances’ every contrarian was harping about 5-years ago have intensified in recent years. In other words, and if forced to make a call, I still like owning gold at current prices despite the fact that precious metals could see a major correction(s) before the USD blows-up.
Looking back
It may be worth remembering that USD sentiment was significantly more bearish in late 2004 than it is right now, and that the USD ended 2004 at a record low versus the Euro. What happened in 2005? The dollar confounded almost everyone and rallied, strongly: After averaging $1.34 to the dollar in December 2004 the Euro had slumped to $1.13 the dollar by November 2005.
One of the few people spotting the 2005 dollar recovery early was Marc Faber (Dec 8, 04). Should the dollar hit a new record low versus the Euro it will be interesting if Faber makes a similar call. Myself, I am waiting for the response in the FX market to U.S. policy makers. Sometimes silence speaks volumes: meaning the dollar may continue to slide simply because speculations fester that the U.S backs a weaker dollar. This is the headline from December 2004: Dollar Falls to Record $1.35 Per Euro on Speculation U.S. Won't Stem Slide. Some others from December 2004 are compiled below.
As for gold, I liken the pause in precious metals to the speculation that capital is piling onto the Euro-train. When, and if, this train fills up and capital still wants to move away from USD gold could find its legs.
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Headlines From December 2004 (Green articles no longer active)
Dollar Is Set for Longest Annual Losing Streak Since Louvre Accord of 1987 BL
Dollar Falls to Record $1.35 Per Euro on Speculation U.S. Won't Stem Slide BL
Dollar Halts Advance on Speculation Snow May Allow a Weakening Currency
France´s Gaymard says dollar fall could turn ´catastrophic´ AFX
Merrill, Top Currency Forecaster, Expects Further Dollar Drop Bloomberg
Weak US dollar in 2005 will get worse before better Reuters
U.S. Rogue Nation Image Hurts Dollar in Asia Pesek
China will shake West's strategy TT (Guardian)
When the West loses faith in a falling US dollar, as is widely expected, the house of cards might come falling down
’China factor’ behind US dollar woes New Straits Times
China sees gold-buying surge to hedge against declining dollar - report AFX
Stop dollar's fall, Brown tells US as deficit hits $165bn Guardian
Schroeder Says He's Concerned About Stronger Euro BL
Bush's 'strong dollar policy' comments fall on deaf ears USAT
Dollar's Fall Is a ‘Wake Up Call,' IMF's Rajan Says Bloomberg
US Dollar worthless now? India Daily
The problem is that if dollar collapses, there is nothing that can stop a catastrophic worldwide depression.
Debt and the dollar EPI
The United States damages future living standards by borrowing itself into a deceptively deep hole
Crisi$? What Crisis? Rostenko Competitive Devaluation Wang
There's a reason why "dollar crisis" is so oft repeated in the news today. To desensitize the financial world to fears of a dollar crisis, thereby nipping the problem in the bud
The Shoeshine Boys in Bolivia Know the Dollar's Going Down Bloomberg
But do you really want to own euros and yen?
2005: Year of the weak dollar AFP
Euro Trash Slate
Even drug dealers are giving up on the dollar.
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