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August 15, 2004

The US Trade-Abyss
by Alex Wallenwein

The already infamously large US trade 'gap' has widened into a yawning abyss in June of this year. The dollar, with its well-known 'leaden duck syndrome', has until recently been prevented from rolling over the crumbling edge by an intricate network of ropes and pulleys. That 'safety catch' is about to expire on its own terms, leaving the dollar free to comply with the immutable laws of economic gravity.

They say a picture speaks louder than a thousand words, so take good look at this chart from James Turk of GoldMoney.com:

The dollar index has just bounced off the top of its downtrend channel that goes back to January 2002. James Turk's expert commentary on this chart ends with this paragraph:

In short, Federal Reserve actions suggest that they believe that the economy can better handle higher energy prices and more inflation than rising interest rates. The consequence is a lower dollar - and in time, much higher gold."

I have been saying for about six months now that rising rates are the real danger to the US economy. Unfortunately, rising rates are the only thing that can tear the dollar out of its current funk - but the economy just won't survive it. That doesn't paint a very pretty picture of what is to come for the dollar.

It is also noteworthy that the dollar's downtrend channel is not a descending converging triangle that begs for a breakout tot he upside. These two lines are perfectly parallel, which means that the downtrend can go on for a long, long time.

With all of the soft economic news around, with security jitters, a building global oil crisis leading inevitably to domestic price inflation, with US consumers (responsible for a full one third of total GDP) over-stretched to the max under a crushing debt load while facing rising interest rates and therefore debt-servicing costs, the dollar index has no way of reversing its downtrend anytime soon.

I know that gold investors are completely beside themselves. This was supposed to be the year that gold hits $500 or more, and all we have seen so far is gold back below $400 for the most part. What gives?

Answer: take the longer term perspective.

As you can very well see, gold is doing great, actually, since the dollar is rocking and rolling itself into the ground. It's just that, when you move your face right up to a small boulder that's lying in your path, at ground-level, and look at it from a few inches away, the darn thing seems to block the entire horizon. You can see only it, nothing else.

A lot of people do that when looking at their gold investments. When the road immediately ahead is clear and the price of gold is rising, they are ecstatic - but they descend into a morass of self-pity and demoralizing doubt whenever someone throws a little rock into their path. They creep right up to it and whine and whine at the "insurmountable obstacle" and the "evil machinations" of the gold manipulators.

Honestly: whose side would you rather be on? The side of the manipulators who, like Circus jugglers, have to keep all of their balls in the air at all times or lose everything? Or would you rather be on the side of gravity?

Gravity really doesn't care if the juggler is in control or not. Gravity knows the balls will ALL come down eventually - and the longer they have stayed up, the sooner that time will come.

People who hold physical gold are on the side of gravity. They KNOW that things will eventually turn their way, sooner or later. They also know that, this time around, the manipulators don't really have any arrows left in their quiver. Paul Volcker shot "the big one" back in 1981 when he raised US interest rates to 15 percent and higher to lure investment funds away from gold and back into the dollar-fold.

That 'arrow' is now gone forever. Raising interest rates even back to 'normal' levels is out of the question under current conditions. And those conditions are not going to get any better, anytime soon!

The entire world economy - still largely dependent on the US - is slowing down together with the US. The European Union's persistently anaemic growth is slowly hemorrhaging whatever blood it had left in it. Germany, for example, the former economic power house of Europe, sees its 'growth' firmly entrenched in a trading range between zero and next-to-nothing (from 0.2% in Q4 last year to a "whopping" 0.4% in Q1, and then "all the way back down" to 0.3% in Q2 of this year). France fares no better. England's real estate boom is about to crack wide open. Italy's economy is barely worth mentioning.

Japan, since March this year only barely out of the woods after trekking its decade-and-a-half long trail through the deflation jungle, is already watching its tiny economic upswing taper off and die. If this continues, Japan will soon have to go back to literally buying its economic survival by selling freshly printed yen for overprinted dollars to keep the yen low enough for Americans to keep splurging on Sony and Toshiba products. This will become harder and harder as the dollar suffers from its catastrophic trade gap problems, plunging ever deeper into the abyss of monetary profligacy.

China and India are having severe inflation problems that are exacerbated by skyrocketing energy costs. Both countries are applying their economic brakes already.

The US trade-gorge and the downward pull it exerts on the dollar may help US exporters somewhat by making their products more competitive. But in an age of stumbling US stock prices, with no more low-interest rate crutches to support the stock market's buckling knees, this colossal walking-corpse economy is about to reveal its true Zombie-nature.

The US consumer's consumption is already severely curtailed by the constantly rising gasoline expense. Increased transportation costs will soon be factored into regular consumer goods as well, including food. The long term uptrend in interest rates only adds to that pressure.

Fed-in-the Box

There is no way out. If the economy is great and demand-led price pressures develop, the Fed must raise rates faster, which will kill consumer spending and therefore the economy. If the economy sucks and foreign investment in the US drops off precipitously, it must raise rates too, so it can re-attract foreign capital. Either way, the maxed-out US consumer eats dirt and the Fed loses out - big.

If the Fed were to fail to raise interest rates during any of the upcoming FOMC meetings, it would thereby tacitly admit that Greenspan's rosy picture of US economic health was nothing but a fib - and the dollar would sink like a Russian submarine. If the dollar does for some strange reason explode upward and out of its long term downtrend, US exports will suffer, putting further downward pressure on the economy, and the trade-gap will turn into a tectonic plate shift. The promised land of economic recovery will swim ever further away from us.

It doesn't matter which way you skin this cat - it's still a dead cat, whether it happens to be bouncing for the time being or not.

The big question is: in the face of all this, what are you going to do with your money?

Will you use it to try and feed the dead cat, or will you use it to buy something that can sustain you in the long run? Buying into dollar-assets is like buying Enron stock after the scandal broke. Remember that "buying dollar-assets" includes betting on paper-gold rather than buying gold itself.

Remember also that, in the not so distant future, after all is said and done, we will either live in a world where fiat is spent and gold is saved (and freely traded), or in a world where the only "legal" way of buying and selling anything is through biometrics-activated, central government-controlled "virtual money" accounts. In the latter case, gold and silver will be "black market" money for those who refuse to be plugged into that Matrix-like nightmare.

Owning gold is a good way to prepare for either contingency - unless you want to be a human battery.

Got gold?

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is your golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

Copyright © 2003-2008 Alex Wallenwein

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