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Ned W. Schmidt

Ned W. Schmidt

Ned W. Schmidt,CFA,CEBS is publisher of THE VALUE VIEW GOLD REPORT and author of "$1,265 GOLD", published in 2003. A weekly message, TRADING THOUGHTS, is…

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Moneyization Part Four

Moneyization: The global financial phenomenon of individuals and businesses moving their funds to monies in which they have the highest confidence, or money which has a higher store of faith.

Monetary complacency is clearly not the norm, as evidenced by the recent collapse of the U.S. dollar. Clearly, some around the world are moving to monies in which they have a higher store of faith. Having been one of the bears on the U.S. dollar for some time, the current circumstances do not come as a surprise. With Gold recently reaching a new cyclical high, the champagne corks popping can be heard in the background of the e-mails we read. However, certain perspective and coolness of thought must be retained. Breakfast has different meaning to the chicken and the pig.

Questions and consideration on which to reflect:

  • Will central banks readily surrender to the fall of the dollar?

  • Has the dollar fallen too far too fast despite the long-term bear market?

  • Is the dollar the only currency falling in value?

  • Is my home currency at risk also?

  • Should I be buying Gold or retaining my home currency?

  • Has the bear market for the dollar really started?

  • How does the dollar's bear market end?

In money, survival of the fittest will indeed be the rule.

But, governments do not surrender readily or easily.

The first question deals with whether or not the central banks around the world will react or respond to the dollar's recent depreciation. A lot of words have been wasted on the question of the dollar's fundamentals. Most of those positive utterances were essentially nonsense, as the dollar's fundamentals are just simply rotten. The simple fact is that too many dollar assets are held around the world. Every central bank around the world has got dollar assets stacked in the closets, in the basements, or anywhere else they can find room.

Markets in recent times have had a tendency to move to an extreme. The current euphoria on the NASDAQ and the recent experience in oil are fairly obvious examples of market extremism. Oil prices one month are in the mid-fifties and the next in the lower forties, as an example. A subtle, and probably irrelevant, change in news on oil inventories, caused a dramatic shift in the price of oil. Similar events could unfold in the market for dollars.

Many times investors want reasons for a market acting in a certain way. Some fundamental related to the real world, they believe, must be driving what is happening in the market. Often the real fundamentals are just the movement of money into and out of a sector of the markets. Oil went to an extreme simply cause too much money followed the signs of positive momentum. In hindsight, no fundamentals were driving the price of oil to the recent peak. The sell off of oil was simply that money moving back out of that market. Money moving is a fundamental of a market, but not the kind of factual fundamentals so many seek.

The recent collapse of the U.S. dollar's value is related to money movement. Have the fundamentals of the U.S. dollar really changed in the past few weeks? More likely is that the dollar's fall is simply related to money movements in the market. That "sell the dollar" attitude has pushed the level to roughly the equivalent of $55 oil a few weeks back. Oil may go higher in the long run and the dollar will no doubt also go lower in the long run. But, the recent action in the dollar appears more like an over sold condition brought on by excessive short-term speculation.

Neither the Federal Reserve nor the European Central Banks seem prone to intervention. Philosophically, both institutions do not seem inclined to actually interfere with market action. About the time the screams to do something are the loudest is when the dollar market will turn. Nothing was done when electricity prices skyrocketed upward in California, and down the price came. Oil is the most recent action. Unless some tangible event can be identified neither central bank will intervene. Rather, they will just let this recent market run exhaust itself. Do note that such an attitude is what insures the long-term bear market for the dollar remains intact.

Next week the Federal Reserve meets. Given that the ECB did not raise rates, the Fed's actions will signal the seriousness of their attitude toward the dollar's problems. A rate increase of 25 basis points would mean the U.S. will not take action to support the dollar. The rate increase must be 50 basis points, or more, to suggest that action is being taken to support the dollar. 25 basis points, or less, is a signal that selling the dollar is still the wisest long-term strategy.

Governments are not done supporting the dollar, as buying of dollar debt continues. Though we will see later the enthusiasm may be waning. Chart One portrays the holdings of U.S. government and agency debt by official institutions at the Federal Reserve. These central banks have not yet ceased to accumulate dollar denominated assets. Lately the accumulation actually rose as more dollars were retained by these institutions.

Some central bankers may be nervous. They may be in the press screaming for the U.S. to do something. But, their jobs are important to them and most would not actually care to work for a livelihood. For political reasons, central banks are not joining in on the dollar selling. Try to imagine a central banker, owning billions of dollar debt, willingly taking an action to destroy part of the value of those investments.

Taking a look at other statistics will not identify widespread dollar fear. Selling of the dollar by the broad, global public does not seem widespread. U.S. monetary statistics do not indicate yet any wide move out of the dollars. At some point boxes of dollars will start appearing on planes returning to Washington, but that does not yet appear to be happening. Wide spread selling will occur, just not yet.

The negative short-term sentiment will run till exhausted. Recent action suggests that this sour, short-term mood is starting to wane. Many funds and traders would like to take profits. December is now in its second week. These groups do not like to work hard or risk profits in the latter part of December. These pseudo dollar bears are likely to book some profits.

Do not be surprised by a quick, sharp rally for the dollar. Such a move would be consistent with a bear market pattern. Rallies in a bear market are upward thrusts, followed by long, slow declines. At the present time, the psychology on the dollar and God, while right in the long-term, is at an extreme for today, and excessive. A bear market rally for the dollar grows increasingly likely.

Gold, reflecting the excessive market mood for the dollar, has been over bought. Short-term enthusiasm is too high. A correction for Gold is due. While many realize that, they refuse to admit to the possibility. Gold is vulnerable in the short-term to below $410 and Silver to $7. While a correction will frustrate some, long-term investors will use these lower prices as buying opportunities.

Many investors, rather than simply focusing on the dollar problems and Gold's move, should be paying more attention to their individual situation and national money. In previous articles the Gold price of national monies has been discussed. Readers unfamiliar with this work should review them in the archives of one of the popular Gold web sites.

The reason for focusing on the Gold price of national monies is that this approach helps to understand the true movement in a national money. Your national money may be going up versus the dollar, but losing value versus Gold. Chart Two plots the recent trend of some important national monies. In terms of Gold, none have been gaining value regardless of what they have done against the dollar. Attention should be focused on the true value of your money, not the dollar value. As is apparent from the graph, none of the four major currencies plotted have a positive trend in terms of Gold.

The following table helps further to understand the trend for the true value of national monies. Only one, South Africa, of the eight national monies has been experiencing a rising Gold value. Yes, the U.S. dollar may have been the worst performer. Note though that the rest are also losing value versus Gold. The point? Each investor needs to assess the true fundamentals of their own national money. Should the investor own gold or their national money? What your national money is doing versus the dollar is interesting but not the critical issue.

Trends & Ranking in Gold Price
Selected National Monies
South Africa 1 1
Euro 2 3
Russia 3 4
Mexico 4 5
U.K. 5 2
Australia 6 6
Canada 7 8
U.S. 8 7
Arrows indicate trend for national money, and number is ranking of country.

This work on the Gold price of national monies is beginning to produce some interesting results, which will begin appearing in the monthly newsletter in December. Such measurements can be used to determine, for example, if a Russian investors should buy Gold. Today the answer is that a Russian investor should not be moving into Gold. The South African money has the same evaluation, but nervousness on that opinion is extremely high. UK investors are in the reverse situation. UK based investors should be converting pounds into ounces by buying Gold.

Each national money has an individual situation versus Gold at any one time. Each individual investor needs to be deciding on the wisdom of holding the money or buying Gold. Learning to think and work in the Gold price of national monies will help you do that. Focus not simply on the dollar's action, but the appropriate buy/hold/sell decision on Gold from the perspective of your own national money.

We need to return to our final questions. Has the bear market started for the U.S. dollar? Of course the answer is yes. In fact, it started two years ago. Only recently has this condition become popular The important point is that the U.S. dollar is somewhere between the start and the end of a bear market. Regrettably, today is far closer to the beginning than the end. The deterioration in the value of the dollar has not yet caused either major panic, major selling, or a major change in the U.S. economic situation.

The dollar's bear market end will be identified by two conditions. Chart Three will identify the first of those conditions. Foreign official institutions remain net buyers of U.S. dollar debt as shown in that graph. When that graph shows serious and prolonged net selling by these institutions, the first condition for the end of the dollar's bear market will have arrived. That selling will be contrary indicator, kind of like when the UK sold Gold, and probably bought some U.S. debt.

The second condition is U.S. interest rates. At the end of the bear market for the dollar, U.S. interest rates will be well into double digits. A prime rate in the 20-30% range is certainly likely. Trying to sell a home will be only slightly easier than selling season tickets to the Miami Dolphins at the present time. Capital controls will be widespread, and U.S. citizens will be restricted on moving money out of the country. Rather than confiscate your Gold, a more likely event will be an exchange of "new" U.S. money for "old" U.S. money with serious limitations.

No one ever contended the road to US$1,300 Gold would be a fun one. Also, no one ever said it would be a straight road. Rallies and corrections are the patterns that come together to create a market move. Be selective in the timing of your Gold purchases. If you ever hear yourself saying that you must buy today cause the market is getting away from you, stand up and turn off your computer. And finally, each individual investor needs to assess the situation for their own national money versus Gold. Do not take comfort in the fact that you do not own U.S. dollars for in reality your money may also be depreciating versus Gold.

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