first majestic silver

Deadly Dollar Dominos

April 4, 2006

Giant geopolitical factors have been dominant toward the gold price in the last half of 2005 and the early part of 2006, having eclipsed trade deficits, absent savings, price inflation, and other plebeian economic fundamentals like consumer demand, job growth, or industrial output. Bond yield differentials continue to be important, but lately, writing on the wall clearly paints a picture of US interest rate advantage slowly fading from springtime rains. Gold seems poised for a meteoric rise. A confluence of powerful forces is at work, far more inter-related than we might perceive or admit. Some of the crucially important listed factors lie in the past, while some are in current status. Some factors lie in the future, either on the cusp of tomorrow or just down the road. Political demonstrations and weather storms provide a violent stir of the global cauldron. Trade war serves as the nitroglycerine ingredient within the cauldron.

  1. General Motors and Ford Motors undergo debt rating downgrades
  2. Chinese govt delinks the yuan currency directly from US$
  3. King Fahd dies in Saudi Arabia, and Abdullah takes the reigns
  4. USGovt blocks the Unocal deal from CNOOC acquisition
  5. Hurricanes Katrina and Wilma devastate the US Gulf Coast
  6. Euro Central Bank begins its tightening cycle with two rate hikes
  7. Schumer trade tariff bill against China gains support in US Congress
  8. Dubai Port World deal to control US ports fails, resolved by compromise
  9. Iraqi Civil War erupts, conflict festers with Iran, Persian Gulf destabilized
  10. extra USFed rate hikes threaten to pop the US housing bubble
  11. Yen Carry Trade is slated for an orderly unwind
  12. Russia and China accelerate official gold accumulation
  13. key debt rating downgrades continue, such as for Iceland govt bonds
  14. master inflationist Ben Bernanke makes his imprint as USFed Chairman
  15. the USFed stops publication of the M3 money supply
  16. the USFed hikes rate until the next LongTerm Capital Mgmt debacle
  17. Asia agrees upon a currency for their new credit market (yuan basket?)
  18. coordinated chaos seems orchestrated amidst rising nationalism & protectionism
  19. General Motors and Ford Motors suffer a broad union-led
  20. US Gulf Coast hit by more hurricanes, after two hit Australia before April

The April report (issued midmonth) for the Hat Trick Letter will tie many of these factors together, in much the same manner as past reports have. Let's step back and take a longer-term viewpoint. Several key landmark events have occurred in the last nine months, as an acceleration has clearly shown itself in the weakening to the USDollar worldwide foundation. The trend is sure to resume. As the dominos have toppled, one by one, renewed momentum has created a significant headwind for the world reserve currency. Taken in isolation, each domino is of minor importance. Taken together, the sequence spells bigtime trouble for the clownbuck. Several listed factors actually are tied together by curious threads. One can learn a lesson in modern day life: there are few coincidences which involve truly large momentous events. The bigger the event, the more likely its planned occurrence, the more likely its integration with other critical events.

Since the year 2001, gold has responded inversely to the USDollar. When the bloated buck falls, the gold price rises, like a children playground teeter tawter. The exception has been since midsummer 2005, not enough to establish a trend. One can actually argue with some justification that the US$ rose in the second half of 2005 from an oversold reaction. At the same time, the gold price rose uninterrupted. Many analysts argued that gold decoupled from the US$, here too in my scribbles, during this time span. It might be more accurate to claim a semblance of continued inverse correlation between gold and the US$ continues. As the bloated buck has stalled versus other currencys in their exchange rates, gold persists in rising.

Gold might be much more driven by background management of foreign reserves than from the marginal value of the US$ versus other major currencys. Asians, Middle Easterners, and others are questioning their vast holdings of USTreasury Bonds. The world has a vested interest in preventing a crash of the US$ on a global basis. There is plenty of incentive in bond arbitrage among speculators to keep the pressure on reasonably strong US$ demand. That bond yield advantage offered by the USTreasurys is not going to go away. It cannot. High US rates are here to stay, with foreigners holding the USTBond as hostage, the victim sure to be the US housing sector and USEconomy itself. Foreigners have changed their reserves management and have given a higher priority and ratio among holdings to gold.

The issue of gold investment as an inflation hedge is always prominent. The manifestation of monetary inflation is so diverse in its forms that confusion reigns widely even as its omnipresent liquidity rains on the entire economic landscape. Banks and the US Congress have proved themselves incapable to rein in this inflation when our status quo depends so critically upon it. To stop inflation, our nation must undergo a depression.

The United States contains massive housing inflation, bond inflation, stock inflation among its asset groups. Concurrently, the USEconomy contains massive cost inflation from higher energy prices and a universe of higher costs tied to living expenses. Asia contains massive expansion of industrial production capacity which has exploited incredibly cheap labor inherent to their sphere. The export of US inflation to Asia, and the conversion of our paper inflation to excess production capacity has essentially created a giant whirlwind of deflationary pressure to the USEconomy. It comes in the forms of reduced import prices of finished products and lost wages, from American to Chinese. We in the United States have a cyclone of rising asset prices and falling real economy prices (product and wage). Some can meaningfully label it a hurricane. As much damage has been levied on our body economic from the abuse and dependence on inflation, as was doled out by the hurricanes on the Gulf Coast.

Officials inside China are grumbling about the bloated USDollar. The ground under their Chinese financial feet is rumbling with public statements that China should use some of its vast foreign reserves to buy gold bullion. A scheiss storm this way comes, as in brown ice.


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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors For personal questions about subscriptions, contact him at [email protected]

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

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In the Aztec language the name for gold is teocuitlatl which means "excrement of the gods."
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