www.timeless-gold.com
Monthly Report April
Still Time to Buy the EUR?
Up-date N° 5 / May 30, 2005
Peter Zihlmann
On October 4, 2005, we stated, with the EUR/USD rate at 1.1576:
"We still believe that the previous high of 1.1932 will eventually be exceeded and that the EUR will likely move towards 1.30 over the long run."
As we now know, the "long run" did not take that long and by December 30, the exchange rate in fact superseded the 1.36 mark, even though only briefly.
At the beginning of the new year, a correction set in and has lasted several months, so it seems timely to examine what the future course may be.
The long-term picture
The above long-term chart tells an eye-catching story: What goes up has to come down, or what comes down will eventually go up!
The duration of a trend varies, of course. The down-trend which started in 1995 ended in 2001 and lasted five years. The present up-trend has lasted four years, a lot longer than what we experienced from 1986 through 1995.
At this stage, nobody has the answer at this stage to the question how long the trend may continue, even though arguments abound to the effect that the USD will weaken further against other major currencies, mainly because the USA would like its currency to fall, or other currencies to rise, like the Chinese Yuan which is considered to be overvalued by about 40%.
Furthermore, the Japanese have spent huge amounts of money to keep their currency, the JPY, from rising.
The medium-term picture
Greed and fear are the main reasons why markets go to excesses and there are no fundamental arguments to explain these movements. Greed and fear are also difficult to measure and can only deliver a vague guidance as to where the market will move next.
Greed causes us to be confident while fear keeps us from buying when we should.
Nevertheless, we know where we are and in which direction we are likely to move. Therefore, at present, we would suggest to buy at this level. In the worst case, we may have a correction from oversold territory; it the best case, the up-trend will resume.
The short-term picture
The EUR has been trending down against the USD since the start of this year as the graph above shows. While the long-term trend is still pointing higher, no-one can tell when it will end. Therefore, betting at this stage that it will resume, may prove to be wrong. Nevertheless, doing nothing can also be wrong!
Our recommendation is therefore to buy EUR against USD bearing in mind that it may take some time before people start selling dollars again.
Is the USD still fundamentally overvalued?
We do not think that any of the basic economic imbalances are close to be resolved, such as the huge trade and budget deficits currently carried by the USA. The present expansion is the longest running expansion on record. It has surpassed all other economic expansions before it.
The driving force behind it is the rapid growth of the money supply and the explosion of credit that has accompanied it. Like a drug addict, the U.S. economy has become immune to the supply of money and credit that drives it. It now requires an even greater dose of money expansion and credit to keep it afloat.
The continuous rise in equity prices has caused people to put their trust in the stock market. The result has been a dramatic drop in the nation's savings rate. With the stock market rising, consumers have chosen to spend their savings, and more recently, borrow money to maintain their life styles. Last year total credit in the U.S. economy expanded by $2.2 trillion with half of that amount being used by consumers and the other half by the financial system. America is now a capital consuming country, reflected in the fact that the current rise in foreign indebtedness exceeds net domestic investment.
The dollar may have its ups and downs within the long-term trend but we do not believe that the long-term down-trend of the US-dollar will be reversed quickly.
Our recommendations were valid at the time of writing, viz. at
and not necessarily when you happen to read them.
For information or specific questions you may have, or the services we offer, contact us at investment@pzim.com.
Peter Zihlmann
www.pzim.com
investment@pzim.com
forex@pzim.com
May 30, 2005
Disclosure: The author has not been paid to write this article, nor has he
received any other inducement to do so. The author is a shareholder in the
company and will benefit from any increase in the company's share price.
Disclaimer: The author's objective in writing this article is to invoke an
interest on the part of potential investors in this stock to the point where
they are encouraged to conduct their own further diligent research. Neither
the information, nor the opinions expressed should be construed as a
solicitation to buy or sell this stock. Investors are recommended to obtain
the advice of a qualified investment advisor before entering into any transactions
in the stock.
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