2008: Dollar to Bounce, Gold to Surprise?
By Adrian Ash
January 3, 2008
Want a racing certainty for
the coming year? Take a look at the US Dollar & gold...
WHO CAN SAY what 2008 may bring?
A post-Olympics crash in China, perhaps, tipping
its near-10% annual rate of expansion into an historic slump...
The first annual fall in UK house prices since
1995, maybe, unwinding a chunk of the near-quadrupling of London
real estate values...
In the United States, a bottom might finally be
found in Florida or Californian real estate. But we'd expect
Paris Hilton to win the White House with Ron Paul as her running
mate before then.
Yes, the Dow Jones stock index could push higher
still to new all-time highs...even measured in terms of the
Euro, rather than simply counted in the fast-vanishing US
Dollar.
But the New Year has already brought the world one
new all-time high that clearly says otherwise – and it only
took one trading session for the Gold
Market to jump 2% and break its three-decade record of $850
per ounce.
The anti-everything-else, gold clearly signals more
trouble ahead for the rest of the world's investment markets –
starting with the very value of money itself. That's the nagging
doubt that drove Gold
Prices higher every year between 2001 and 2007.
And here at BullionVault,
we think it will take more than a bounce in the Dollar to
reverse gold's seven-year bull market, too.
We don't doubt that newly-penned gags on Jay Leno's
Tonight show might turn up this year alongside a pause in the
Dollar's collapse.
By the end of Sept., says the latest data from the
International Monetary Fund (IMF), the US Dollar accounted for
less than 64% of foreign currency reserves worldwide. That might
cue the Greenback to thumb its nose at the Euro, now risen above
26% of official cash reserves worldwide.
Factor in the Dollar-doom cover stories from
magazines including The Economist and Newsweek,
and the case for a contrarian play only gets stronger. Everyone
agrees the Dollar looks sure to keep falling, even the policy
wonks of the world's central banks! And as a very successful
options trader once reminded me, the markets are always sure to
do whatever it takes to screw the most people the most.
So maybe it's time for a surprise from the
Greenback, now one-third cheaper than this time six years ago.
Spanking the world's central bankers – and sucker-punching
private investors, now busy gearing up on the forex markets –
a turnaround in the US currency might just coincide with a
genuine political crisis in the 13-nation Eurozone, too.
But "with Bernanke at the Fed and Paulson at
the Treasury, and a Euro that could
face some problems (a break-up, some believe) because of badly
deteriorating economic conditions in Italy, Spain, Portugal, and
Greece," as Marc Faber writes in the latest edition of his Gloom,
Boom & Doom report, "precious metals are likely to
outperform financial assets for some years to come."
Indeed, whatever comes in the Presidential race –
and no matter what happens to inflation in the cost of living,
now running at multi-decade highs in Europe and China, despite
their surging currencies – the real driver of gold's
seven-year bull market looks to be the New Year's one racing
certainty.
Governments and central banks the world over
will refuse in 2008 to protect cash savers and bond buyers.
They'll cut or hold interest rates in the forlorn hope of
helping debtors instead, destroying the buying power of all
official money.
Yes, gold might fail to rise as a result. But that
would prove a heart-stopping shock, far more surprising than the
most likely "shock" – that gold keeps on rising even
if the US Dollar stops falling against other government
currencies.
Just take a look at how the Gold
Market got here today. The new record highs hit on 2 Jan.
2008 came for nearly everyone Buying
Gold on the last trading day of 2007, no matter whether they
bought in US Dollars, the Euro, British Pounds, Swiss
Francs...Canadian, Aussie or New Zealand Dollars...Indian Rupees
or South African Rand...Thai Baht or Chinese Remnimbi.
Only Japanese investors still hold a currency today
worth more against gold than at some point in the past. And the
irony there is so tasty, Burger King should offer it on the
Whopper.
Near-zero interest rates failed to kick-start the
Japanese economy for 18 years after its real-estate and
financial bubbles popped. Tinkering with target rates of less
than 1% since 1995, the Bank of Japan still hasn't worked any
magic by trying to destroy the value of the currency it prints.
Yet it's the Japanese lesson of the early 1990s
that's now pushing the US Fed, Bank of England, ECB in Frankfurt
and pretty much every other developed-world central bank to
offer up more money via cheap interest rates as a way of
defending the current financial bubble from collapse.
How come? Mistaking more money for more wealth
whenever they look at Japan, central bankers now have this error
scratched onto their corneas. "The failure to end deflation
[meaning falling prices, wages and real estate values] in Japan
does not necessarily reflect any technical infeasibility of
achieving that goal," announced Ben Bernanke in a speech of
Nov. 2002.
Blaming instead a "structural" need to
restore Japanese banks and corporations to solvency – an eerie
forecast, perhaps, of the huge short-term liquidity injections
co-ordinated by the Fed, ECB, Bank of Canada and Bank of England
right now – the current chairman of the Federal Reserve
added that:
"I do not view the Japanese experience as
evidence against the general conclusion that US policymakers
have the tools they need to prevent, and, if necessary, to cure
a deflationary recession in the United States."
Put that another way, as Bernanke himself did in
2004, and "excessively cautious monetary policy did play a
role in [Japan's] lost decade...because it did not do all that
it could have done to arrest and reverse the deflation."
Excessively cautious monetary policy? The Bank of
Japan took interest rates for cash savers below 0.2%...and it's
left them there for the last 13 years. The only Japanese
citizens to benefit so far have been investors choosing to Buy
Gold.
Nearly two decades after the Japanese offered the
world a lesson in what can happen when excess credit and
financial innovation turn first to bubble and then bust, average
wages are still falling, down another 2.1% in November.
Household spending fell 0.6%, whilst industrial production
dropped by 1.6%...and the cost of living rose by 0.4%.
All this in a currency that stubbornly refuses to
sink, meantime, despite the Bank of Japan's best efforts to
destroy the very money that it prints. Proof positive, in fact,
that a falling currency isn't necessary for Gold
Prices to rise. Need more? Gold gained 31% last year for
British investors – its eighth annual gain on the run – even
as the Pound itself hit a two-decade top versus the Dollar. The
European single currency gained nearly one-fifth versus the US
currency last year, but the Gold
Price in Euros also rose, gaining more than 21%. (That also
disproves the common belief that gold and the Euro move in
sync.)
Indeed, the price of gold measured against the
world's five most important currencies – the US Dollar, Euros,
Yen, Pound Sterling and Canadian Dollar – has now gained more
than 150% since the start of this decade. Real rates of
interest, on the other hand, have trended sharply lower, falling
across the world even as oil-driven inflation – itself stoked
by excessively easy money policy – has begun to roar.
"Japanese equities are out of favor and so, as
a contrarian play for 2008, are among my top picks," says
Marc Faber in the Gloom, Boom & Doom report.
Funnily enough, "aside from Japanese equities, a contrarian
play would be to buy the US Dollar," he goes on.
"Sentiment and headlines are so universally
negative that at least a short-term rally should get underway
shortly. The only problem I have with being positive about the
Dollar is that, whereas people are universally bearish about the
Dollar, they are also universally still long a gargantuan
quantity of dollars!"
As for Dollar alternatives, on the other hand,
"among commodities and currencies my preferred asset
remains physical gold held outside the United States, for the
simple reason that – depression or inflation – it is very
likely to outperform financial assets.
"For gold, I believe the best is yet to
come!" concludes Faber. Whereas Dollar rally or not, we
believe here at BullionVault,
the currency markets will prove just a suck of ever-shrinking
real worth in 2008.