Why does the weak housing market lead to a falling dollar and strong gold?
*Dow Theory Letters, Richard Russell, October 30, 2006:
"Dollar by dollar, billion dollars by billion dollars, the rest of
the world, the world that saves -- is buying up the US. We create the
fiat dollars with which we buy the world's products -- and the world
collects the dollars -- then uses them to buy up the US. The figures
are mind-blowing. As of this October, foreign investors owned almost
43% of all US marketable treasuries, 32.7% of all outstanding US
corporate bonds, and just over 16% of all US equities. And the numbers
keep continuing to climb.
With foreigners owning so much in US Treasury and corporate paper, you
know that our creditors are keeping a watchful eye on the US dollar.
And why wouldn't they? After all, foreigners own upwards of $4 trillion
in assorted US assets.
The Fed is in what I call a tight spot. Many foreign central banks are
now diversifying out of dollars. Even Alan Greenspan noted this
phenomenon in a speech he gave in Canada last week. In order to
increase the dollar's "attractiveness," Mr. Bernanke would normally be
tempted to raise rates. But with a trillion dollars worth of variable
rate mortgages coming up for re-setting next year, this would not be
the time to raise rates. In fact, Goldman Sachs is betting that the Fed
will lower rates to 4 percent next year. And analysts at JP Morgan
agree, as does Bill Gross of PIMCO.
Yet analysts at the Fed appear to be worried about inflation, and they
are even predicting a better economy in 2006. The bond market
disagrees. Bonds have been rallying and rates have been declining. The
yield curve has been turning increasingly negative (inverting). The
bond market is betting that business will slow down next year.
Lower interest rates make the US dollar less attractive. And over the
last few weeks the dollar has been heading down. How far down is the
big question. A lower dollar means that imports to the US become more
expensive. More expensive imports in turn mean rising inflation. It
becomes a vicious circle, and if it continues Ben Bernanke is going to
be facing a nasty and rather puzzling situation.
A weakening dollar represents a "wake-up call" for gold. Most people
don't realize it, but rising gold is a form of dollar-devaluation. It's
not an official devaluation, I call it a "free market devaluation". "
*This information is solely a highlight of the opinion of a third-party publication and is incomplete. Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.
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