Quo Vadis Greenback?

July 1, 2002
US Dollar Index 80-85 Target

So suggest FOREX data from 1971 to 2002. Moreover, last week the Wall Street Journal featured an article, entitled "Soros Says Dollar May Post A Sharp Decline." Billionaire currency speculator Soros opined the greenback could well lose a third of today's value in the next couple of years.

But one might ask why this is happening, and more importantly, if it is indeed possible for the greenback to fall back to it 1995 level…or worse?

Why is the dollar falling?

Everyone knows the greenback (ie US Dollar Index) peaked again early this year at 121 (it hit 122 in July 2001). However, in the last five months it lost 12.4% (121 to 106) vs. a basket of major currencies. This begs the question: Why is the dollar declining?

The cardinal cause of today's US economic malaise is the over-valuation of the dollar, which is the lingering legacy of the Clinton reign. In 1995 Clinton tapped Robert Rubin (the then president of Goldman Sachs) as Secretary of the US Treasury. It was no secret the quintessential representative of Wall Street fanatically favored a strong dollar. Consequently, Rubin's subsequent monetary policy was to methodically and relentlessly institute policies to enhance the buck's value. The momentum of these mis-directed policies fueled the dollar advance to from 85 its 122 peak in July 2001. A by-product was creating the greatest market BUBBLE SINCE 1929.

Now President Bush is holding the bag

A dollar too dear has crucified the US economy, and Bush is holding the bag. America has lost its export markets. Consequently, it is running record export deficits month after month (balance of payments deficits). Unemployment is on the rise. And to boot foreigners are cashing in their US investments, repatriating the proceeds as the stock market BUBBLE rapidly deflates.

I feel certain the US President has no alternative but to institute a covert policy via the Fed and US Treasury to slowly but surely push the greenback value back to 'Pre-Rubin' levels...ie its value in mid-1995.

The dollar's fall as been methodical and orderly…seemingly guided by an unseen hand. Only in recent day's has the fall accelerated. See chart:

President Bush is staring at an alarming increase in UNEMPLOYMENT, and all its dire ripple effects on the American economy. THEREFORE, he is literally obliged to slowly allow the dollar to fall in order that US business can again be competitive in world markets.

Indeed a '1995-dollar' is the target sought by the Administration...and it appears to be right on course (having already shed 12.4% off its February 2002 high).

Quo Vadis Greenback?
(where is the dollar going?)

A review of the dollar declines from 1971-2002 reveals that indeed the US Dollar Index is most likely targeting the 80-85 level. The table below shows statistics related to seven major dollar declines in the past 32 years.

To normalize the data I omitted Event 4 (1985-1988), which obviously was an anomaly.

Observations gleaned from the Dollar Decline in Review:

  • Average decline period lasted 19 months
  • Average decline range was 108 to 85
  • Average decline was -20% (but including event 4 it was a -24%)

Among the seven major dollar declines, five found their nadir in the range between 80 to 85. This demonstrates a 71% probability the next dollar low will be between 80-85. Moreover, the average 19-month time decline implies bottoming might occur late next year. However, if we assume the real peak (122) was July 2001, then the bottom might materialize in January 2003. This latter interpretation lends more credibility in view of the dollar decline YTD.

Personally, I am convinced the US Dollar Index will visit 80-85 area in 2002.

Soros agrees the Dollar will fall

As previously mentioned George Soros says the US dollar could well lose 1/3 of its value in the not too distant future. Remember it was Soros who almost broke the BOE in the early 1990s when the pound sterling was devaluating daily. Reportedly, the guro of all monetary guros made more than $1 Billion by correctly being SHORT the British pound.

And if financial genius Soros is again correct, the US Dollar Index is ill-fated to fall to 71.

Central Bank Intervention

It was widely reported that there was overt Central Bank intervention on Friday June 28th), which kept the buck from freefall. Well, it WON'T WORK ! Every serious student of FOREX well knows INTERVENTION NEVER EVER WORKS. It only postpones the inevitable. And although it slows the rate of descent, it has the grossly negative trade-off of exacerbating the final condition.

Correctly used, Central Bank Intervention is merely an action to ensure an orderly decline, so as to avoid panic dumping which might precipitate a total COLLAPSE OF THE CURRENCY. A recent classic - albeit tragic - example of this is the peso of Argentina. For months on end the Argentine Central Bank bought the peso against dollar in a futile attempt to stave off devaluation. During the intervention period the Argentine government emphatically swore it would never allow the peso to decline. When the Central Bank used up all its 'intervention ammunition,' the peso collapsed virtually over-night. Before intervention, the peso was at parity with the greenback (1:1). Most recently the decimated peso is 4:1 vs the US dollar (a crushing 75% devaluation within an excruciatingly short period).

Correspondingly, the peso value of gold soared with little restraint. The peso price of gold soared over 360% in less than 6 months. See chart below:

Exactly the same happened to Venezuela almost 20 years ago. The Bolivar was 4:1 vs the greenback. There was cavalier Central Bank intervention galore - all while the government ranted THERE WOULD BE NO DEVALUATION. Well, from 4:1 it went to 1366:1…a draconian devaluation of 99.99%. Literally, the old currency became TOTALLY WORTHLESS. Tragically, all lost their entire life's savings.

How will the dollar decline affect gold?

With or without intervention, a dramatic rise in the dollar price of gold is inevitable. Premised on the hypothesis that the greenback is headed toward a level it has seen numerous times in the last 32 years (i.e. 80-85), it will have lost approximately 25% off its present value. In this event I would expect the shiny yellow to revalue AT LEAST that amount. Therefore, I fully expect gold to reach $400/oz in 2002. However, if Central Banks continue to meddle with their impotent intervention, market supply/demand dynamics will takeover and most likely will propel gold to $500/oz or even beyond.

It is appropriate to end my report with the prophetic comment made by the eminent Technical Analyst at GOLD-EAGLE (8X8--):

"This is the first time in memory
we can count on the US Government
to help goldbugs."

Note: Much of the above was extracted from posts of many at the Gold Forum. All I did was to blend the ideas and observations of other analysts into one document.

One cubic foot of gold weighs more than half a ton (1,306 pounds).