Moneyization Part Thirty-three

By: Ned W. Schmidt | Wed, Nov 29, 2006
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Moneyization: The global financial phenomenon of individuals and businesses moving their funds to monies in which they have the highest confidence, or money in which they have a higher store of faith.

Or, Ceteris Paribus & U.S. Dollar

Sometimes when preparing an often done dish for a meal the chef will change one ingredient. That alteration in the recipe is an attempt to determine if that modification enhances the flavor experience. In this act the chef is leaving all else unchanged. Economists might describe the result as a "ceteris paribus recipe," all the other ingredients held unchanged with the exception of one.

Economists like to use this term when discussing a new concept being introduced into the analysis. Ceteris paribus essentially means "all other things the same or unchanged." In analyzing the impact of a force on an economic system, we first try to isolate only the impact of that force. Everything else is held constant, or assumed to be unchanged. That way we can determine the influence of that single force on the economic system. The Thanksgiving week provided a rare glimpse of the world's view of the U.S. dollar without the influence of New York's group think driven trading.

During the Thanksgiving week in the U.S., business activity experiences a serious slowdown. Much of the financial world winds down on Wednesday afternoon before the Thursday holiday and does not return to an active level till Monday. The influence of U.S. investors was essentially held "unchanged," allowing us to analyze the influence of foreign investors. The markets, without the strong influence of New York paper asset groupies, gave us a rare glimpse of the attitude of foreign investors. The rest of the world was able to vote on the U.S. dollar without the influence of U.S. traders. That vote was a resounding "no." The U.S. dollar was sold with a vengeance, and reentered its long-term bear market.

The following chart is of the value of the U.S. dollar based on the median change of the dollar relative to a basket of national monies. As this measure uses the median change in foreign exchange values, it is superior to the dollar index popularly used. The widely used dollar index is a trade weighted calculation which introduces serious biases into the index. This index uses the median change in the dollar's value which removes some of these biases. The dollar index uses inverted triangles plotted on the left axis. Monthly average $Gold is plotted with circles and the right axis.

First Graph

As is readily apparent in the graph, the dollar has broken to a new low. This development was foreseen in a previous Moneyization article. That breakdown in the global value of the dollar to a new low means that the path of least resistance for the U.S. dollar is down. In that same chart we can see what happens to the value of $Gold when this index breaks down. The last time such a development occurred was the in the first half of 2006, and $Gold spiked to a new cycle high. A similar move lower for the U.S. dollar and a move higher for $Gold seems to be in process.

Second Graph

Another way of viewing this ongoing move out of U.S. dollars into monies in which investors have a higher faith, the moneyization process, can be observed in the second graph. These shifts occur in waves of positive and negative psychology on the dollar, or any other national money. The oscillator in the second graph, solid line and right axis, is an attempt to measure that psychology. To make the oscillator more easy to use it is flipped upside down, a reading of -100% is maximum bullish optimism on the U.S. dollar. That level was achieved during October while Street was on a bullish dollar rampage. During such periods of dollar optimism $Gold is weak. The dollar price of Gold moves down.

Since that bout of excessive optimism, the psychology has shifted to a more realistic bearish view on the U.S. dollar. One consequence of that shift has been the sell off of the dollar during the Thanksgiving week when the world was free to vote on the dollar without the interference of the New York group think. Another consequence is that $Gold has moved higher and is like to move higher in the future. A strong possibility exists that the U.S. dollar may enter a period marked by a violent depreciation on foreign exchange markets. Gold is important wealth protection during such periods.

The voting in the foreign exchange markets by foreign investors was rather clear. Path of least resistance for the U.S. dollar is down. Path of least resistance for $Gold is up. Investors are moving to Gold and Euro as they have higher faith in the value of those monies. Those individuals able to invest in the Chinese Yuan are doings so as the long term value of that money is likely to be superior to that of the U.S. dollar. The dollar is no longer the money of choice for global investors.

A major reason that the U.S. dollar's bear market is likely to enter an acceleration phase is the rapidly deteriorating prospects for the U.S. economy. Rarely do investors want to own the national money of a nation entering a recession. The U.S. economy is rapidly heading toward a hard economic landing. That the U.S. is entering into a recession should be readily apparent in the first part of 2007. Deteriorating economic trends are clearly appearing. For example, Wal-Mart which represents 8% of U.S. retail sales reported that sales were down in November.

The heart of the U.S. economic expansion has been the housing bubble, and it has burst. Much hot air has been created in the fervent hope of finding a bottom in the collapsing U.S. housing sector. Despite the headline number on October sales of existing home, the underlying data produced little that suggested a bottom is near. Sales of single family homes, like the one you live in, did improve in October to the second lowest level in a year. These sales are off 11% from a year ago. Condo sales are now down 15% from a year ago. Identifiable condo inventory for sale is nine months of supply. Prices of single family homes are down 3% from a year ago after rising $200 in October. Condo prices are off 5% from a year ago, and are at the lowest level in a year. In some communities, home sales are off 50% from a year ago. The economic repercussions of this real slide have yet to show in the numbers, but with foreclosures in the U.S. in a decidedly rising trend that will happen.

As the dollar loses value on foreign exchange markets, the real value of a dollar denominated investments goes down. A foreign investor's dollar denominated wealth falls in value each time the dollar trades down on foreign exchange markets. These investors have already reduced their rate of buying of U.S. dollar debt. When they realize that their losses on dollar debt are mounting, their desire to buy more will weaken further. Their lack of buying and then selling will send interest rates in the U.S. much higher.

Contrary to what the Street believes, the global markets are more powerful than the Federal Reserve. The financial markets have continued to act as if the U.S. can set domestic interest rates in isolation. That belief is in error in today's world. Rising interest rates will send U.S. housing into further decline. U.S. economic activity will follow that collapse in the housing market. A bottom for coming U.S. economic recession will be well into 2008. As a consequence, the value of the U.S. dollar is far from its ultimate bottom. Gold has strong fundamentals that will propel it to the current target price of about US$1,400.

$Gold From: Value View Gold Report

The above chart on Gold shows that the metal bears have been wrong. Gold's unwillingness to satisfy the bears is due to the fundamental demand for the metal around the world as protection against a collapsing U.S. dollar. As we witnessed during the Thanksgiving week, the only real bears on Gold are on Wall Street. This is same group that thought the NASDAQ was worth 5000, and now are running rampant with private equity takeovers. The game in paper asset will again have the inevitable crash, and Gold is a way of protecting your wealth. Gold is currently trying to correct and an over bought condition, and may go through a rolling correction. Periods of price weakness will always develop. Use all such price opportunities to add to holdings of Gold. $Gold at $675-700 is likely by Christmas. New cycle high is expected in January.

$Silver From: Value View Gold Report

One source contributing to continued optimism on Gold has been the resilient Silver market, shown in the above graph. Silver has refused to accommodate the bears. Silver's action is a leading indicator of what we can expect in Gold. Rather than accommodate the bears, Silver continues to show the benefit of the fundamentals, more demand than supply. Having recently taken out the last short-term high, Silver is likely to produce a new cycle in the coming months. However, an overbought condition at present may cause a slowing in the rate of price appreciation in the short-term. Investors should prepare themselves to use all weakness in price to add to holdings. When Silver is more than $15 a lot of people are going to suddenly discover it.



Author: Ned W. Schmidt

Ned W. Schmidt,CFA,CEBS
The Value View Gold Report

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 also available to electronic subscribers. You can obtain a copy of the last issue of THE VALUE VIEW GOLD REPORT at The Value View Gold Report. Ned welcomes your comments and questions, and tries to answer most all. His mission in life is to rescue investors from the abyss of financial assets and the coming collapse of the U.S. dollar. He can be contacted at

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