The long-term picture

On January 9, we wrote that we believe that the trend clearly suggests further losses for the US dollar and that the 1.30 level would eventually be tested.

The US dollar has since lost another 2.5%.

Someone wrote that "all predictions are ridiculous". This may well be so, especially in view of the Iraqi war which may cause "unpredictable" price movements short-term.

Nevertheless, the Iraqi war will hardly solve any of the economic problems facing the world. The down-trend of the US dollar against other major currencies is well established and will very likely be maintained for the foreseeable future.

The medium-term picture

Medium-term, we believe that the consolidation within the down-trend is slowly drawing to its end. Quite a few people expect a powerful rally in the stock markets and the US dollar, accompanied by a collapse of the oil and gold prices. It cannot be excluded as a short-term reaction.

On the other hand, even a removal of the present Iraqi leader, if successful within a few weeks, could not be expected to offer a permanent solution to the region's problems.

Why attack one country because a UN resolution is not respected, when no attention is paid to other unfulfilled UN resolutions?

Therefore, we dare to predict that the slide of the US dollar against other major currencies (CHF, EUR, GBP, JPY) will continue for a considerable time, as long as the economic imbalances the US carries with other nations are not corrected.

The short-term picture

Short-term, the consolidation that started at the beginning of the month of February seems to be drawing to an end, and we expect an eventual break-down from the area between 1.34 to .1.35 to test the support dating from October 1998 when the dollar briefly dropped to 1.2725.

Are US markets fundamentally cheap?

Historically, a FAIR valuation of US markets has indicated a dividend yield of 4 to 5%. Nonetheless, current dividend yields are still below 2%. Historically cheap US markets yield upwards of 6%. The answer to the above question is therefore simple: NO! As pessimism spreads, gold will rise, the dollar will fall as will all the major US indices.

Fundamental Considerations: The USD has Lost its Magic

• On the basis of a fundamental currency model, the CHF is still undervalued by around 20 %.The short-term goal during the coming two years is around 1.25 to 1.30 US dollars to the EUR. The flow of capital between the Eurozone and the USA for investments such as equities, corporate bonds, government bonds and money-market securities will be reversed in the direction of Europe. It is believed that the projected relative development of fundamental evaluation factors - including growth potential, equity-market analysis, levels of return, inflation potential and budget deficits - is uniformly in favour of the old continent.



• Classic exchange-rate theories involving purchase-power parity and interest-rate parity also indicate a 15 to 20 percent upward valuation of the EUR. Many players in the market still give these theories a great deal of credence.



• The high levels of the US current account deficit during the past 10 years have entailed a large number of foreign central banks piling up big US dollar reserves. Asian central banks could trigger a severe currency crisis if they substantially reduced dollar positions and purchased EUR with a view to diversifying their currency risks. The German Bundesbank is also still managing big US dollar reserves, a major proportion of which is likely to be sold during the next few years, because they have become largely superfluous since currency reserves have been transferred to the European Central Bank. The current situation recalls the position at the end of the Bretton Woods System in 1973 when the world was also swamped with dollars due to the US trade deficit, and the central banks finally resorted to gold in order to spread currency risks.



• The key fundamental factors have been indicating a drastic devaluation of the American currency for years. However, for some months now investors have also been receiving clear signals based on chart data indicating that the dominance of the American dollar is now history. Taking a perspective of a few weeks, the US dollar could win back some ground, but long-term analyses show charts tracing out clear top formations for the Greenback.

If you wish to receive our Follow-ups on the above recommended gold shares, simply register at www.pzim.com or send an e-mail to investment@pzim.com

Peter Zihlmann

March 7, 2003