Double Barrels Against US$

December 14, 2005

The USDollar is next to be subjected to a double-barrel assault, call it a shotgun. The first barrel lies in the financial sector. The interest rate advantage gradually fades, as the Euro Central Bank has begun its tightening cycle. Despite language antics and American-style games, FOREX experts anticipate numerous ECB rate hikes from their base at 2.0% toward at least 3.0% eventually. Meanwhile, the US Federal Reserve is likely to end its tightening cycle of the Fed Funds target before the ECB has completed its own rate increases on their standard rate. The primary driver behind bond arbitrage, higher US rates on short-term yields, has been neutralized and soon might reverse. The rate differential might narrow sometime in 2006, maybe even in 1H2006. Given how the financial tail wags the American dog, this rate shift is sure to have a marked effect on the USDollar.

The second barrel lies in the real economy, the foundation to the entire system. The October trade deficit exploded to a record $68.9 billion, with a slightly higher oil bill to foreign producers and a slightly lower crude oil price. Gulf of Mexico oil production has yet to be fully restored. The Chinese bilateral trade gap expanded to a record $20.5 billion. Capital flows are important. Large companies doing business in the import-export trade buy and sell large quantities of currencys in preliminary fashion to the closure of large deals. The hemorrhage in capital from the United States to Asia (for finished products) and to the Persian Gulf (for crude oil) is sure to have a continued marked effect on the USDollar. Recall the Austrian tenet, that financials revert to the fundamental theme, and core statistics for the United States are nothing short of resembling a Third World nation.

The Euro Central Bank announced in early December a 25 basis point hike to 2.25% in their standard interest rate, even as the US Federal Reserve might be two hikes away from the end of its tightening cycle. Each movement from the current position, up for the ECB and toward the end of US hikes, negatively affects the USDollar. Lost support for the USDollar will be good for gold. In the process, the euro has bottomed at 117, so it seems. However, the ECB was careful in its wording not to mention any new pattern of "measured pace" for their hikes.

The lack of clear future ECB hikes renders the euro currency as vulnerable still. Professional FOREX traders expect several ECB hikes. Just as in the US, forward hedging and speculating is available across the Atlantic Ocean on future monetary policy. The futures contracts in Europe indicate an implied 2.625% standard rate in March, an implied 2.865% standard rate in June, and an implied 2.955% standard rate In September. So claims denying a measured pace of ratcheted hikes are empty, as those incremental steps in rate hikes are very much anticipated. Has the USGovt and USFed exported blatantly deceptive policy language? Methinks YES. Let's hope they do not adopt blatantly fallacious corrupted deceptive and falsified economic statistics as well, like what the USGovt embraces.

The USFed raised its Fed Funds target rate to 4.25% this week. The heretical belief seems unflinching, that economic growth with near full unemployment spawns price inflation. Little attention seems to prevail among economists that our credit growth is the well-spring of price inflation. An extension of the Non Accelerating Inflation Rate of Unemployment (NAIRU) and Phillips Curve nonsense prevails.We have neither strong growth nor a low jobless rate, but rather a powerful propaganda machine which purports each phony story. No clear comprehension exists that rising prices have occurred on the cost side but not on the wage side of the equation. In its language, the USFed repeated an expectation it would likely need to push rates up further to keep inflation at bay, suggesting at least one more quarter point hike ahead. "The committee judges that some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance."

The unfortunate rub for US monetary officials is the flattened yield curve, registered now at under 10 basis points on the spread between the 2-yr yield and 10-yr yield, (4.39% versus 4.46%). See the Treasury yield curve chart. These lousy economists have taken the time-tested reliable indicator to the edge of flashing "recession." Generally speaking, US economists are the worst in the world, having become market apologists, government salesmen, brokerage whores, corporate promoters, and academic teachers of heresy. An entire generation of badly educated economists is running our national financial system, endorsing the heretical policies, and defending policies made within that system.

While the Japanese yen is a key currency, the more important currency bound to see the effects of policy change is unquestionably the euro currency. Let it be said the yen carry trade perhaps has begun to unwind, as the yen has moved almost 300 basis points on Wednesday alone!!! Volatile currency markets have arrived to usher in tectonic shifts on the monetary landscape, a primary impetus behind gold. We are at a technical juncture with the euro, as it has rebounded strongly. It has met the 20-week moving average, a guide for movement in the past several months. My analysis in late summer and early autumn called for the 119-120 level to hold. It did not, as the ECB was stubborn to hike, or else the USFed was moronic to continue its hikes. Whatever the interpretation, the rate differential widened more than perhaps it needed to widen in US versus ECB rates.

Months down the road, technicians might actually perceive the dip below 118 as "leakage" to explain the climax low. The European Union economic fundamentals are strong, as trade surplus has been achieved, and budget deficits are less than half those of the United States. EU growth is slow, just like what un-falsified US growth statistics would reflect. EU joblessness is high, just like what un-falsified US unemployment statistics would reflect. My new Zurich friends (made at a November gold conference) expect the euro to rise toward 130 in the year 2006, a view shared by my staff of one. A reversal of rate fortunes (differentials) will turn the tailwind for the USDollar into a headwind against it in coming months.

How better to describe the US trade gap than as a capital hemorrhage? It almost entirely explains why credit explosion in the United States goes hand in hand with tepid money supply growth. We print new money at the household trenches, and send it to Asia and the Middle East. A slammed exclamation point was delivered to the trading tables on Wednesday, as a record September trade gap was easily surpassed by a mammoth October trade gap nearing $70 billion. The Chinese bilateral gap has moved step by step from $15.3 billion in Jan2005 to $20.5 billion in Oct2005. Apparently the July decision made in Beijing to upgrade the yuan currency by 2%, and the Thanksgiving action quietly made to upgrade the yuan by another 3% have done little to drive down the Chinese trade gap. This confirms a summertime forecast made with my Hat Trick Letter. Talk about a treasure trove with the Peoples Bank of China from which to purchase gold!!!

My analysis took much criticism in late 2002 and early 2003. My forecast was for the USDollar to drop by 20% to 30% against major world currencys, while at the same time the US trade deficit to widen tremendously to make huge records. That has happened. The reason was simple. The USEconomy has five primary manufacturing components: cars, pharmaceuticals, gasoline refinery, electricity generation, and aircraft/defense. The car industry, well, just say it is somewhere between the funeral parlor and the intensive care ward. The drug industry is pockmarked by high prices, outflanked by generics, and undercut by Canadian & Mexican equivalents and knockoffs. Since the hurricanes hit last August and September, gasoline refinery has benefited from imports while capacity has been restored from damage. Generation of electricity, although a stable field of production, has been challenged by higher crude oil, natural gas, and coal prices. Imports of hydro-electricity from Canada augments supply. Whereas the USGovt blocks export of high tech products to Asia (China in particular), we do permit export of Boeing aircraft and military equipment. Military export is brisk to our allies, a destructive influence and drag on their economies.

Sorry, but this nation has abandoned most of its export machinery, and is left holding a bag of soft tissue and pyrotechnic ingredients. A lower USDollar has done NOTHING, NADA, RIEN, to ameliorate and remedy the trade gap. In 2006, expect even greater trade gaps. As long as the USEconomy relies upon retail consumption as its sick sorry pathetic foundation, look for trade gaps to increase with any perceptible internal economic growth.

The year 2006 will prove lethal for the USDollar and enthusiastic for gold & silver. The reasons are numerous, outlined in two previous articles. See

"A Bundle of Gold Factors" to list numerous currently relevant factors why gold rises, which add to the simplistic notion that gold rises from the onset of price inflation

"Lost Dollar Pillars" to highlight the eroding pillars upholding the USDollar, like Euro Central Bank tightening, ended US$ repatriation, lame Asian US$ support, etc.

Since the summer months, gold has decoupled from the USDollar. Some claim that gold in the last few weeks has decoupled from the euro currency (yet to be fully demonstrated). If we see a decline in the USDollar, as my analysis forecasts, the rise in the gold price is likely to become a parabolic event for months on end in a highly visible major Elliott Wave III event. When the USFed ends its tightening cycle, gold mining stocks will benefit. When hedge funds unwind their "long gold metal, short gold stocks" strategy in the new tax year, gold mining stocks will benefit. If and when it is clear that gold will be rising in price faster than energy and construction costs, gold mining stocks will benefit. Few seem to attribute the recent breakout in gold worldwide to the transition from the Greenspan Fed to the Bernanke Fed. It is a piece of the mosaic, whose many pieces are clearly bullish for gold.


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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 at 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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