first majestic silver

What if?

March 9, 2005

Caveat: This article has been written by way of a "brainstorm session" of a type that is typically used in Corporate strategic planning sessions. It represents a "Plan B" type of thought process, and serves to demonstrate that in today's complex world, it sometimes pays to think outside the box.

What if Mr Buffett turns out to be wrong in his bet against the US Dollar, because he is basing his arguments on the old fashioned view that people in debt typically have integrity, and will therefore honour their debt obligations?

This article has been written from a base assumption which challenges such foundational beliefs. It proceeds from the question: What if the World has become totally amoral at Governmental level?

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What if the US Dollar were to rise AND the gold price were to rise? Ridiculous question? Don't be so quick to react.

Mr Buffett is doubtless a brilliant individual, but I've learned over the years not to try to fight City Hall.

Ours is not to reason why. Ours is to "listen" to what the markets are saying. And this is what they are saying: (All charts courtesy DecisionPoint.com)

First: The US Dollar has historically lagged short term interest rates by about a year, and short term interest rates have been rising since the beginning of 2004.

If the dollar rises from its current level then, technically, it will break UP through the falling trendline on the monthly charts, and this will be a HIGHLY significant break

Second, The weekly gold price chart, having broken through the critical $425 level, subsequently gapped down below it. Recently, it has gapped back up through it again. In this analyst's view, these gaps are highly significant - as is the $425 level.

Trendlines can be drawn on this chart which show that the gold price recently bounced up from a lower channel line, and that the resistance level of the upper channel line is $475

But if BOTH gold AND the dollar break up, then the Goldollar Index should also break up. Guess what? A careful analysis of the following chart shows that such an eventuality is eminently possible.

Now, under what circumstances would a US Dollar rise to defy Mr. Buffett's bet?

Clearly, the Deficit is weighing on the US Dollar, as is the US Sovereign Debt.

But there is a foundational assumption underlying the bet against the Dollar, and that is that Governments behave like people. Let's check that.

If an individual does not pay his debts, the bank forecloses. But what if the bank is its own client? What if the cartel of Central Bankers is in fact calling the shots? Why would the G7 (the World's Central, Central Bank) move to foreclose on itself? If the NET debt between G1 through G7 is zero, what would be gained by liquidating G7 to pay G1?

So, letting the imagination run a bit wild, let's assume that the US Sovereign debt is irrelevant. The issue "may" turn out to be that the US Deficit is unsustainable and interest rates have to rise to protect the US Dollar.

But if the G1 lands up funding G7 in perpetuity, and the net debt of G1 through G7 remains zero, the only basis on which rates would need to rise within the US (or any other country) is if the local economy within the US (or any other country) started to spiral out of control.

Now, in the "olden days" when a Government printed barrels of paper money, monetary inflation inevitably led to price inflation because demand exceeded supply.

But nowadays, supply capacity exceeds demand on a world wide basis. For example, there is an issue in the Tele-radiology industry where US radiologist are fearful of radiology services becoming so commoditized that Indian radiologists can assess US X Rays at a fraction of the cost charged by US Radiologists - using electronic imaging techniques in conjunction with the Internet. At present this is illegal because the Indian Radiologists would have to be accredited by hospitals in the USA, but if the "price" within the US ever becomes an issue, watch those barriers to entry start to fall.

Today, the only "negative" effect of printing "barrels" of money is that there is likely to be "asset inflation"

And? So what?

Provided the price of raw materials did not spiral out of control, low labour costs and excess capital equipment capacity on a world wide basis would keep a lid on prices.

So the key is to keep the price of raw materials low.

But raw materials have been spiraling upwards - and out of control. Just look at the $CRB

Aaahhh! But there's something very odd about the $CRB chart - It is VERY overbought. Look at the PMO!!

What do we think would happen to the $CRB if the US Dollar started to RISE?

Well, if commodities priced in US Dollars were exposed to a rising US Dollar - they might begin falling in US$ denominated terms as "dishording" took place; and as demand fell away at the margin.

So the ratio of the $CRB to Gold would start to fall (as the charts are telling us is imminent).

And if the Gold Price stayed above $425 (and maybe even rose to $475) , and the US Dollar started to RISE (and show technical strength at this point) then the following would happen:

  • The Goldollar Index would break up
  • Gold in non US currencies would start to rise
  • A "rising" dollar would allow consumer prices within the US to remain stable
  • Exporters to the US could continue exporting
  • The US Deficit and Sovereign Debt would continue to grow.

But as we have just demonstrated, if one assumes that Governments and Central Banks don't think or act like individuals, these facts are non issues in a "closed" circuit system.

And the paradox would be that all of us holding gold and related investments would find our investments rising - precisely because the "mean" Central Bankers do in fact control the World Economy.

Have I messed enough with your minds yet?

The moral: The onion has many layers, and peeling them away typically leads to tears. You want to take a gazzilion dollar bet against the World's Central Bankers? Be my guest. I'll sit this one out.

But I am certainly holding tight onto my gold and related investments.


The Incas thought gold represented the glory of their sun god and referred to the precious metal as “Tears of the Sun.”
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