The Porsche Syndrome
On the anniversary of US's Pearl Harbour bombing, I'll refrain from the "easy" analogy today and won't speak of the Japanese "bombing" the US Dollar, on the contrary, they have been the US Dollars' best friend these last years. I mean, who else besides the Chinese have been buying, no, sweeping up the US Treasuries to keep the USD going? The Japanese. Now, let us all bow down in thanks and sip on a glass of sake rice wine. Otherwise, the Dollar would have been incinerated quite a while ago, I suppose.
Meanwhile, with a bit more time off than usual, I've been able to catch up on some reading material. I don't know if I'm anymore the clever for it, more confused yes, but more clever is doubtful. One of the things which, as in love, caught my eye, was the phrase : "when we feel deeply, we tend to interpret narrowly" which I sometimes think sums up both the gold and US Dollar cheerleaders rather succinctly. Everyone says the Dollar is dead. Everyone says gold is going through the roof - and at that - it's doing it tomorrow. Dare I say, I have my doubts on both counts.
Why? Too MUCH vested interest. It's simple. The powers that be - Central Banks - I believe, do not want a US Dollar rout to take place. Nor do they want gold and silver to sky rocket. Remember, national economies hang in the balance, so if any Dollar depreciation is going to take place, then it should be "orderly". That is their mandate - keep the order. Ok, so in a downward bias towards the USD. That has certainly been the case these last 2½ years going from 83 cents to 1.34 cents against the Euro. Painful certainly, but not "going Argentinian" as it were.
I have now read so many excellent articles from "experts" and "old timers" on why gold will soar - tomorrow , why gold will correct lower - tomorrow - and very few who have admitted that they don't know where it is going in the short term. I believe I'm in the last group. From a purely fundamental point of view, gold has a lot going for it - at least with respect to the US Dollar price - and therefore should be still advancing in Dollar terms. I mean, the US Dollar is still falling and has not bounced significantly upwards. Likewise, intervention to my knowledge has not been swift or even forthcoming as of yet. ECB is still on the sidelines and the Asians are likely more than fed up with FED Dollars. Technically, gold looks overbought and articles on the Der Invest Informant site, show those indicators running out of steam. Both the XAU and HUI indices have been operating poorly these last weeks and losing considerable steam, nearly 5-7% down. Individual gold equities are no where near their Q4 2003 highs. Historically, the last quarter of the year has traditionally been strong for the metals - and indeed - gold and silver have advanced nicely these last weeks.
What's going on and where does all this leave us? I currently believe the financial world is running into a fundamental conundrum which has crept up on them and, being human and lazy, and being politicians and C-Y-A orientated, have done little to rectify the "happy party" of the last years. I call it the Porsche Syndrome. Where one who is intent on killing himself (The Fed) decides to at least "go out in style" and takes the 911 turbo up to 10.000 rpm into a brick wall - that certainly seems to be the US' fiscal model. But as long as the seat-warmer is on and gentle music wafts through the interior, who cares how it all will end - I'm comfortable for now. But getting back to the point, I believe the financial world is currently in limbo. It KNOWS the US fiscal house is in terrible order. It also knows that the distasteful medicine required for the US (consumer saving, government saving, cutting budgets + deficits, increase internal investment, rolling back the empire, etc) will also harm the "export pushers" as this will cause their economies to equally be short-term affected. Hence, the dollar continues to fall and a world is turning to itself and asking "What next shall we do?". The thing is, they don't have an answer - they are groping. Meanwhile the DOW and Nasdaq are rising. Why? I think investment managers are looking to either push year end returns up or keep investors in a good mood or both. After the Bush inauguration in January, maybe the markets will give us more "clear speak".
At this point, I am searching for more clues. The bond action has been yo yo. Up and down fakes, but no real KEY action. The bond and currency markets are MASSIVE - but still no decisive movements yet.
We will need to look for a plethora of puzzle pieces and I don't think it will be easy. I have read articles of a "muddle through" economy for the next 10 years. I have also read Jim Rogers who thinks the commodity bull will last for the next 20 years. Could both be right? Sure, but also could be wrong. I do give much credence to that scenario though - Asia is expanding and needs raw materials, Asians like gold not paper, Asians are tired of US hegemony and see economic might as a valid weapon....we just need to wait and see.