Taylor on US $ & Gold

KEEP YOUR EYE ON THE DOLLAR'S VALUE

FOR MORE CLUES ON INFLATION

Certainly the weakening U.S. dollar of the past few days must also be adding to the inflationary pressures for the U.S. As the dollar weakens, it will mean imported prices will rise which will also allow U.S. producers to raise their prices. But which way is the dollar headed? I believe it is headed drastically lower, though the timing is always hard to predict. In fact, if the gold market is about to rise dramatically, as I believe it might be, the dollar could weaken sooner rather than later. Incidentally, most pundents suggest that the gold price is a function of the dollar. I rather believe the dollar may be much more dependent on the gold price than most people believe, which is one major reason why the powers that be continue to manipulate the price of gold lower as part of the strong dollar policy instituted by the Clinton Administration. But as we suggest in our gold commentary this week, the price of gold may be about ready to blow straight skyward as the truth about the gold manipulation becomes ever more obvious.

Does Treasury Secretary O'Neil Favor a Strong Dollar?

Our new Treasury Secretary O'Neill, was most likely speaking honestly when he first took office. At that time he expressed some views that perhaps the U.S. dollar was too strong. Coming from a man who headed up a giant aluminum company, that view is not too hard to understand. But boy did he get blasted by the financial markets and the media who are now also suckered into the stock market to such an extent that a rising stock market is about all that matters to them. So the reasoning of economic illiterates like Geraldo Rivera, Chris Matthews and Bill O'Reilly is lets keep the dollar strong if that means a bull market in stocks, even if the dollar's strength has nothing to do with its true intrinsic value.

The stock market cult of the Clinton years has suckered most of middle class America and up into the game of financial prostitution and the unreasonably strong dollar, boosted by a manipulation of the gold markets, has helped suck increasing amounts of money into American markets and thus help keep stock prices up and the banking industry with plenty of deposits from which to magically create even more money out of thin air. But the strong dollar has been murder for basic industries that actually create wealth rather than redistribute it like agriculture, mining and manufacturing. So what we have been seeing in America is a demise of industries that actually create wealth, rather than reshuffle it. Where will this country be when we have not more manufacturing? Where will we be when China has it all?

Having been blasted by the media and stock market cult, yesterday on CNBC, Mr. O'Neill showed that he is perhaps learning the ways of political survival. He said that he loves a strong dollar and suggested the dollar was very robust given its rise even as U.S. economic growth was declining. Yet, even as he was "talking up the dollar", as the Democrats have done over the years, it was in a sharp decline. What I am suggesting is that for political purposes perhaps Mr. O'Neill can now be expected to "talk up the dollar" while privately rejoicing in a weaker dollar so long as it declines gradually. Certainly a weaker dollar will be good for producers of exportable goods, though it is likely to lift prices in general in the U.S.

Might the rise in rates portend a financial disaster?

In answering his own question about interest rates, my buddy Doug Gillespie said, "I think long Treasuries are telling us there's some sort of major problem in progress or brewing."

Doug may very well be right about that. As I rode the bicycle this morning during my workout, I scanned over some of the headlines this past week from the "Financial Times." Some of the more notable ones were the following: "Japan's bad loan problem 'even worse than feared'." "BoJ Warns of deeper deflation." "Chrisis (in Turkey) deepens after U-turn in economy." "World economy 'faces clouds in many directions'." "Warning of growing Japan-US trade tensions." Meanwhile, another headline in Wednesday read "Chinese economy surprises with 8% growth."

In the Weekend edition of the "Financial Times" it was noted that Argentine bonds declined sharply in part because of political concerns there. So there are plenty of potential problems in the global markets and because the markets are so interconnected, as we saw with the Asian contagion, once the dominos begin to fall, market valuations can unwind very quickly in this day of instant communications.

Again I think you should keep your eye on gold as another indicator of a major potential financial problem. The gold bullion banks named in Reginald Howe's law-suit have huge exposure to gold. They have borrowed gold at interest rates much lower than the current rates, and then sold the gold. They have an obligation to repay gold to the central banks at some point in time, but this gold is not within their grasp. That means at some point, they will have to go into the market to buy it in order to return it to the central banks. In 1998 Mr. Greenspan told the bullion bankers that they need not worry about rising gold prices because in his words, "....central banks stand ready to lease gold in increasing quantities, should the price begin to rise."

But now we have an administration in Washington that is much less comfortable with the concept of market rigging by government. I think it is fair to assume the Bush Administration is much more inclined to free market economics than the Marxist leaning folks who previously lived in the White House. So there is some question as to whether the U.S. will continue to lend its support to the enormous dishording of gold from central banks, which according to Frank Veneroso is far greater than that estimated by the World Gold Council or Goldfields.

In fact, if Frank Veneroso is right, (and I trust his number far more than those of Goldfields) the amount of gold no longer within the grasp of the central banks could be as high as 16,000 tons or about 1/2 of all gold central banks dishonestly claim they still hold! As this fact becomes known, gold may very well double or triple in value in a very short time, and then where will those bullion banks be who have boosted the value of the dollar (and the fortunes of Bill Clinton) with their gold shorting antics when they have to go out into the market and buy thousands of tons of gold at a price two or three times the level they received when they shorted the yellow metal? If we are right about our view on gold, at some point as these facts become known in the market, all hell is going to break loose in the gold and dollar markets.Obviously, you want to be long gold and short the dollar.

With respect to the existing Administration, I think it may be instructive to note that there were only two Fed Governors who voted against the Mexican bail out, one of which was the chief economic advisor to our current President, Governor Lawrence Lindsey. There may be some reason to think the new Administration may be quietly putting the "Kibosh" on the gold price rigging practice of Rubin, Summers and Clinton, who were the same folks who seemed to specialized in rigging many things in their favor, including the truth.