Analysis - recent/future Dollar & Gold trends
dcarr
Posts: 8,421 ✭✭✭✭✭
Generally, gold and the Dollar move in opposite directions. What that in mind, I offer my analysis of the recent past and future trends:
A couple weeks ago, the US trade deficit number for the month came in at 38 billion - somewhat lower than the expected 41 billion. This was seen as a (rather poor) excuse to sell gold. The thinking was that the decline of the US Dollar would slow. That consensus was incorrect. The trade deficit was lower mostly because the Chinese went on a buying spree for US commodities and aircraft. The fact that the Chinese didn't want to keep those extra dollars does not bode well for the future strength of the Dollar. Gold sold off on the erroneous fundamental analysis, only to recover the following week when people came back to their senses.
Then the recent (very subtle) change of wording in the Federal Reserve report spooked everyone. Again, gold sold off for all the wrong reasons. Upward pressure on interest rates will indicate that the government is having trouble moving all it's Treasury Bonds. That situation will not bode well for the strength of the Dollar. But gold sold off heavily. It has now stabilized, and will move up shortly as people come back to their senses.
Lost in all of this was the recently announced record US budget deficit. That is what will be the REAL fundamental factor driving the market.
Also lost in the details is how Japan's record currency intervention actually seems to be driving both the Yen AND the Dollar lower together. No matter how much Japan intervenes, the Dollar seems to decline MORE than the Yen. That does not bode well for the strength of the Dollar.
A huge trade deficit alone does not necessarily mean there will be inflation/deflation or a weaker dollar (at least, not initially).
A huge government budget deficit alone does not necessarily mean there will be inflation/deflation or a weaker dollar (at least, not initially).
However, the following is what will ultimately determine the fate of the dollar:
When the government runs a budget deficit, they actually desire an equal (or greater) trade deficit. Why ? Because they need other countries to purchase the Treasury Bonds (government debt). And those countries are a lot more likely to do that when they've accumultated the excess dollars to do so.
During the 1970's, the trade deficit was minimal (or even a surplus), while the government budget deficit was increasing rapidly. The Dollar got weaker !
During the mid to late 1990's, the government ran a (relatively) mild budget deficit, while the trade deficit grew considerably. The dollar got stronger ! That IS, right there, the secret essence of the so-called "strong dollar policy".
Since 2001 or so, the trade deficit has climbed, but the government budget deficits have climbed much faster. The Dollar has gotten weaker !
THE KEY is this :
If the government budget deficit is larger than the trade deficit, then the dollar will drop (perhaps severely).
Recent indications are that the trade deficit is stabilizing (or even declining) while the government budget deficit is exploding. That does not bode well for the strength of the Dollar.
A couple weeks ago, the US trade deficit number for the month came in at 38 billion - somewhat lower than the expected 41 billion. This was seen as a (rather poor) excuse to sell gold. The thinking was that the decline of the US Dollar would slow. That consensus was incorrect. The trade deficit was lower mostly because the Chinese went on a buying spree for US commodities and aircraft. The fact that the Chinese didn't want to keep those extra dollars does not bode well for the future strength of the Dollar. Gold sold off on the erroneous fundamental analysis, only to recover the following week when people came back to their senses.
Then the recent (very subtle) change of wording in the Federal Reserve report spooked everyone. Again, gold sold off for all the wrong reasons. Upward pressure on interest rates will indicate that the government is having trouble moving all it's Treasury Bonds. That situation will not bode well for the strength of the Dollar. But gold sold off heavily. It has now stabilized, and will move up shortly as people come back to their senses.
Lost in all of this was the recently announced record US budget deficit. That is what will be the REAL fundamental factor driving the market.
Also lost in the details is how Japan's record currency intervention actually seems to be driving both the Yen AND the Dollar lower together. No matter how much Japan intervenes, the Dollar seems to decline MORE than the Yen. That does not bode well for the strength of the Dollar.
A huge trade deficit alone does not necessarily mean there will be inflation/deflation or a weaker dollar (at least, not initially).
A huge government budget deficit alone does not necessarily mean there will be inflation/deflation or a weaker dollar (at least, not initially).
However, the following is what will ultimately determine the fate of the dollar:
When the government runs a budget deficit, they actually desire an equal (or greater) trade deficit. Why ? Because they need other countries to purchase the Treasury Bonds (government debt). And those countries are a lot more likely to do that when they've accumultated the excess dollars to do so.
During the 1970's, the trade deficit was minimal (or even a surplus), while the government budget deficit was increasing rapidly. The Dollar got weaker !
During the mid to late 1990's, the government ran a (relatively) mild budget deficit, while the trade deficit grew considerably. The dollar got stronger ! That IS, right there, the secret essence of the so-called "strong dollar policy".
Since 2001 or so, the trade deficit has climbed, but the government budget deficits have climbed much faster. The Dollar has gotten weaker !
THE KEY is this :
If the government budget deficit is larger than the trade deficit, then the dollar will drop (perhaps severely).
Recent indications are that the trade deficit is stabilizing (or even declining) while the government budget deficit is exploding. That does not bode well for the strength of the Dollar.
0
Comments
<< <i>Hello -- I follow your arguments and reasoning. But by the end of your post, you are no longer discussing gold. How does gold figure into this line of reasoning, in your opinion? >>
Simply that when the dollar goes down, gold goes up. A lower dollar is "inflationary", as a weaker dollar buys less and the price of everything goes up (as measured in dollars). As the dollar declines other countries may look to increase their reserve holdings of gold and other currencies, and decrease their reserve holdings of dollars. One currency that is gaining favor in reserves is the Euro. It is more gold friendly than the dollar - and it has, at least, some limited gold backing.
I think we are headed into an inflationary situation, but with little job growth. I believe that is traditionally defined as "stagflation" (although this time it could be hyper-stagflation).
Anyone notice that the Japanese have gone hyper-critical in helping to support our sagging dollar? They purchased 67 BILLION worth in the past 30 days and something like 180 BILLION over the past 5 months. Way to go guys helping to prop of that dollar. Is this anyway to run an economy? You bet it is. Those guys are more patriotic than Americans.
roadrunner
currencies any more except by changing fundamentals and interest rates.
Gold will resume its climb and there will be some inflation to monetize at
least some of the debt. With the improving economy and soaring produc-
tivity there is likely to be lots of job growth in the future also. Inflation
could become serious but this is not inevitable.
The dollar will fall until the trade deficit narrows significantly.
So do you feel they are hoping to inflate their way out of budget deficits and trade deficits? how can this continue for extended periods of time (although it seems to have for the past 40 years)
If the US$ keeps dropping, maybe the US to overseas jobs will return to the US
portant being the governments current expansion of money to stave off deflation, the
increased velocity of money as the economy improves, the chasing of too few goods
with too much money, and the freedom in pricing conferred by the decrease in imports
resulting from the lower dollar. The government debt isn't a huge problem due to its
magnitude but the aggregate debt is becoming troublesome. The fed will not be quick
to try to head off inflation at least in the early days. While job growth will improve it
will not necessarily be robust so it may be politically expedient to allow a little inflation
rather than increase interest rates and stifle job growth.
Demographic forces would also tend to point toward an increase in inflation.
Great Britain took 35 years to harm their currency from the 1870's to the early 1900's.
Greece 30 years under Alexander the Great to destroy the Greek currency and economy.
The Roman Empire? That Empire had 9 lives. Incredible how it lasted despite its abuse of itself. Enough great Emperors to undo the work of inept emperors.
The United States? Looks like we will see the 60 year timeline from 1970 to 2030. The slow abuse approach. 1969 was the last year of a true surplus in the federal budget not counting the surplus in the social security ponzi scheme.
<< <i>If the US$ keeps dropping, maybe the US to overseas jobs will return to the US >>
It doesn't take much for the other countries to devalue their currency too and this is only for countries that have delinked their currencies to the dollar. In the case of China, theirs is pegged to the dollar, if dollar falls, so does remnimbi. Its a zero sum game.
It's kinda like credit card debt. If you make 100K a year and have 20K in credit card debt, it is not the best thing, but not necessarily a really bad situation either.
As for the dollar, this is a self correcting situation. Eventually the dollar gets so cheap that demand for American goods has to increase which in turn props up the dollar.
for what it's worth, my crystal ball says deflation in the next 2-3 years with an increase in small wars throughout the world, most of them involving Islam.
Eventually I see a major conflagration with the two world powers, that being the US and China. No, not world war, but a real mess that will require the finalization of the middle east ongoing crisis and Islam will have to be dealt with.
Dealt with in the sense of putting an end to those 60 million or so who believe that Islam is supposed to rule the world regardless of the death that will require. The UN will be finally reduced to the debating society that most of us know it to be and could cease to exist as we know it.
I don't mean to sound crazy here and I don't think we need to stock up on toilet paper and canned goods either. I do see a world of turmoil for the next 6 to 8 years and those of us in the US are very lucky to live here.
I'll leave the way that affects money and value to those better equipped than I to make judgements on what that would do. My guess would be a general devaluation of most everything once the dust settles.
The odds of an ice age approaching very quickly add another bizarre ingredient to the mix.
We do live in interesting times.
John Marnard Keynes, The Economic Consequences of the Peace, 1920, page 235ff
This is an important point. For 50 years, the Japanese have recognized the value of our alliance, and for about half of that have been happy to buy dollars to support it. The arrangement has generally been beneficial to both parties.
Although I am not among those who tear and tremble at China's rising economic power, it is important to appreciate that the geopolitcial implications of having China as our major creditor are very different from those of Japan.
Regarding our deficit, it is very hard to guess how it will be unwound. Keep in mind that Japan's government deficit is vastly bigger than ours, but it is funded by internal savings. US demographics point to substantially increased savings. If we are to increase savings without causing the global economy to come to a grinding halt, China and Japan will need to pick up spending. Both will, inevitably, to some degree. My own guess is that over about a 20 year period, this will all more or less self-correct. At the end of this period, the US dollar is about where it is today in terms of relative value to other currencies, but it is no longer the reserve currency, with that role being replaced by a basket that includes the US dollar, the euro, the yen, and, ultimately, China's currency. The key to all this happening is a continued commitment to free markets, wise management by the Fed, resisting the tempation (shown equally by the two parties) to overpromise on welfare programs such as medicare, investment in fundamentals such as education, and increased savings. If boomers age wisely, this can all happen.
Do you mean deficit as in trading deficit with other countries, or governmental indebtedness? If the latter, the current U.S. debt is $7,010,088,657,339.47. If Japan's is "vastly" bigger than that, what in the heck is it -- how much bigger?
If so, it would look more attractive than our dollar which is backed by .......air?
John Marnard Keynes, The Economic Consequences of the Peace, 1920, page 235ff
Paper and fiat are the greatest things since sliced bread! Gold is a terrible investment! I have paper and it's all good! Jim Cramer says so!
The talking heads on CNBC tell me that the sky's the limit. Maria wouldn't lie to me. The govt. has a "Strong Dollar" policy. Well by gum, that's good enough for me!
(I saw that Dollardude had yet to post on this thread and it just wouldn't be a PM thread without his "input")
SM1: Still long and strong in PM's.
Forum AdministratorPSA & PSA/DNA ForumModerator@collectors.com | p 800.325.1121 | PSAcard.com
"Ask, and it shall be given you; seek, and ye shall find; knock, and it shall be opened unto you." -Luke 11:9
"Hear, O Israel: The LORD our God is one LORD: And thou shalt love the LORD thy God with all thine heart, and with all thy soul, and with all thy might." -Deut. 6:4-5
"For the LORD is our judge, the LORD is our lawgiver, the LORD is our king; He will save us." -Isaiah 33:22
Forum AdministratorPSA & PSA/DNA ForumModerator@collectors.com | p 800.325.1121 | PSAcard.com
Be careful about comparing any of our published numbers, such as GDP, with anyone else's. These numbers are cooked and have little credibility. Our GDP is inflated by war manufacturing and ridiculous treatment of individual items such as computers. If you eliminate those, GDP is likely half of what is quoted. Same for the CPI and other indexes. Figure on a 50-100% error in the "accounting."
And we have no idea how accurate the other guy's numbers are since we are all looking for the upper hand and want to quote the best possible numbers. Sound familiar....it was what the CFO's have been doing for the past dozen years.
roadrunner
So there you have it. The inflation is low for a reason.
Maybe someone can explain to me why we need a PPI and a CPI?
And the govt only seems to publicize the CPI.
roadrunner
Maybe someone can explain to me why we need a PPI and a CPI?
And the govt only seems to publicize the CPI.
roadrunner
Secondly, lots of neat thoughts and theories in this thread about why gold will go higher. Why go to all that work? The stock prices and currency rates are moving against gold - i.e. people smarter and with better analysis tools are saying "lower." The uptrend is broken in the XAU, and I believe history shows that remaining Long is highly hazardous to one's account value. We all know gold goes way up and way down.
Why do people "like" gold enough to let their account balances prove that gold goes way down as well?
Personally, I'm Short and have been as posted here before. I felt like the likely return, combined with the market's action, indicated a substantial enough return to warrant a Short. I don't recommend shorting to everyone, but I taught myself to actively manage Risk in my portfolio. It ain't rocket science, just understand the ballpark you're playing in and let the account balance tell you if you're doing good or not!
I just don't see this as having any lasting strength. And despite all these shenanigans, gold has weathered the storm. Rather amazing actually.
roadrunner
The current 9 month "trend" in stock is not based on any true change
Roadrunner, my account balance has changed plenty. In fact, I may take that unreal change and buy another new car - just haven't decided what suits us yet.
The only measure I have is account balance, because no other awards are given for being right. If the market returns to Dow 7500, then I'll try to profit on the way down. It certainly won't hurt my *feelings* if the market rises or falls from here.
Yes I'm short gold in the form of stocks. That's the easiest and cheapest way I've found to invest in gold. I don't *know* or *feel* that I'm right. The market is telling us gold is going lower. I don't know if gold is regressing to $395 or $305 - but historically I'm sure you know it has been very, very, bad to be Long when the market decides gold will fall. Then one gets into the "it can't go lower" thought process, which decimated Nasdaq investors.
If gold rises, so what? I'll turn around and be Long again. As long as I get in below where I sold out my account balance is happy
roadrunner
The only thing different from 2003 vs 2000, is that this time the stock investors should know better.
It is shameful to see the public so forgetful and forgiving. People are even back investing based on Operating Earnings! What a joke!
And forget "correct" earnings accounting in and of itself.......it don't and won't exist.
roadrunner
<< <i>Good to see you posting dcarr. I remember seeing some designs you did for the state quarters, have any of your designs been accepted ? The ones I saw were impressive. >>
Thanks,
Since designing the New York & Rhode Island state quarters, and the Maine state quarter (sort of - long story), I've submitted designs to several states. But with the current design process, it is basically futile since the US Mint currently does not accept ANY artwork whatsover from outside the Mint. This includes states who are deciding what to put on their quarter. The Mint will only accept written (verbal) descriptions of the suggested themes - without artwork.
This will change somewhat with the Mint's new "Artistic Infusion" program. I applied for that program, but I haven't heard anything back yet. I thought they were going to decide who gets in by the end of January.
PS: You can see my new state quarter designs via the link below.
<< <i>If deadhorse can worry about an iceage amongest "global warming", then I want to worry about the magnetic poles of the Earth flip flopping. >>
There is no global warming, please. This is a cyclical place and man has virtually no affect on it. The warming of the oceans is the trigger that creates ice ages.
Do a little research and avoid anything with a political bent to it. You might be surprised. We really are poised for an ice age within our lifetimes. Ocean levels are dropping, not rising in spite of all the left wing hand-wringers and Al Gore supporters.
What's so unusual about the magnetic poles flipping? It's happened hundreds of thousands of times before, it doesn't mean the Earth actually flips over, silly boy.
The Navy has tracked the movement of both the magnetic and true north poles for the last 40+ years and they are moving around quite rapidly. We just don't have anything to compare the phenomena to, so that makes any prediction inconclusive.
Got an expensive compass you're worried about?
John Marnard Keynes, The Economic Consequences of the Peace, 1920, page 235ff
<< <i>Yes they do. It's no secret that all of the items that are explosive in price are not part of the CPI: energy (gas, oil, electricity), mortgages (home costs), tangibles, raw materials/commodities (soy, wheat, copper, pork, plywood, gold, steel, etc), grocery foods, stocks, real estate, higher education costs, health care, medicines, health insurance, taxes, labor costs for plumbers & auto mechanics, fees and services of all types, etc. Do you see a pattern here? Yeah, it's what we really spend our money on. And what does the CPI include? mainly durable goods that have a very slow and stable price structure: appliances (can't give those away), automobiles, computers (go down in price all the time), etc.
Maybe someone can explain to me why we need a PPI and a CPI?
And the govt only seems to publicize the CPI.
roadrunner >>
Roadrunner, are you telling me the government cooks the books??
I'm shocked, SHOCKED, I TELL YOU!!! What's next, no Easter Bunny this year? This is MADNESS. MADNESS, the sky is falling!!!.........now where is that sarcasm flag icon I've been looking for?
John Marnard Keynes, The Economic Consequences of the Peace, 1920, page 235ff
<< <i>.
This will change somewhat with the Mint's new "Artistic Infusion" program. I applied for that program, but I haven't heard anything back yet. I thought they were going to decide who gets in by the end of January.
>>
Good luck. There will be some great designs if you get a shot at it.
<< <i>
There is no global warming, please. This is a cyclical place and man has virtually no affect on it. The warming of the oceans is the trigger that creates ice ages.
>>
It is certainly logical to assume that if the planet alternates between ice ages and more
temperate climates then there must be a trigger which causes the change. It is also obvious
that this trigger almost crtainly involves greater warmth. Of course CO2 appears to have
some role and the magnetic field (which is about to shift) could also be a factor.
The new thinking is that ice ages occur suddenly when the ocean pushes large amount of
warm water to high latitudes which creates trementous snow falls in Labrador and northern
Asia. This snowfall is too excessive to even melt in the summer so great amounts of summer
sunlight is reflected back into space causing a large drop in temperature and it immediately
becomes a self reinforcing phenomenon.
I understand the poles flip about every 50,000 years or so. We are not sure what will happen in modern times. "it doesn't mean the Earth actually flips over" Interesting. This is the first place I have ever heard this. Certainly not in anything I said or implied.
Lighten up it was a off hand comment
Regarding the composition of the CPI, you are wrong. The CPI is composed of the following:
FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals and snacks);
HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture);
APPAREL (men's shirts and sweaters, women's dresses, jewelry);
TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance);
MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services);
RECREATION (televisions, cable television, pets and pet products, sports equipment, admissions);
EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).
Although there is room to debate the way the components are weighted, the method is fundamentally sound, and alternative calculation methods will give a generally similar result. Inflation has been low for the past ten years.
I would tend to disagree with your assessment. Health Care and Medical Care could be totally different things. It really comes down to what the breakdown is. There are hundreds, no thousands of items in each category. It can be tweaked any number of ways.
Bottom line is that there is no shortage of highly price explosive goods and services that are not part of the index. I don't see soy,
wheat, or pork bellies as part of the food equation and of course those have risen 20-30% this past year. Rents, but no mortgages, great idea. Does medical included the cost of HMO's to corporations
or is this really only for those who see physicians on their own dimes? The price of HMO's to corporations has gone up a staggering amount the past few years. I'd like to see how they calculate tuition too. What type of schools are included? Where is room and board in the equation - why not a mix of those two?
By what you have listed I would say you have proven my point. About 2/3 or more of those items are somewhat price resistant. A much better mix would be to include volatile items. Do you spend more money each year on computer software or your car payments or services for your car?
roadrunner
<< <i>Lighten up it was a off hand comment
Apologies Joeyuk, I'm so used to being flamed whenever we get into gold and economic threads that I reacted too quickly, we have a couple of nutjobs around here, my fault.
Again, nothing personal and you have my promise to read your posts much more closely in the future.
John Marnard Keynes, The Economic Consequences of the Peace, 1920, page 235ff
Try it with a simple 4 number sequence: 10, 10, 10, 30
To you and I the ave of this sequence is 15 (arith average).
With a GEO MEAN the ave is the 4th root of 30x10x10x10=13.2
When things don't deviate much the answers are the same. When things start to swing the geomean knocks down the peaks. This is a great tool for inflation forecasting. It's no wonder the govt started using it. One result shows a 50% deviation from norm and the other a 32% change.
roadrunner
<< <i>
<< <i>
There is no global warming, please. This is a cyclical place and man has virtually no affect on it. The warming of the oceans is the trigger that creates ice ages.
>>
It is certainly logical to assume that if the planet alternates between ice ages and more
temperate climates then there must be a trigger which causes the change. It is also obvious
that this trigger almost crtainly involves greater warmth. Of course CO2 appears to have
some role and the magnetic field (which is about to shift) could also be a factor.
The new thinking is that ice ages occur suddenly when the ocean pushes large amount of
warm water to high latitudes which creates trementous snow falls in Labrador and northern
Asia. This snowfall is too excessive to even melt in the summer so great amounts of summer
sunlight is reflected back into space causing a large drop in temperature and it immediately
becomes a self reinforcing phenomenon. >>
Exactly correct and the cycle as far as we can tell is around 11,500 to 12,000 years. We are overdue and there are many indicators that such a thing is starting to develop.
John Marnard Keynes, The Economic Consequences of the Peace, 1920, page 235ff
Federal budget was a surplus in 1969, separate from Social Security.
Apparently there was an extra income tax for the purpose of funding war in Vietnam.
It is a shame on both political parties that fiscal discipline is not a bi-partisan effort.
Vote Libertarian.
"Ask, and it shall be given you; seek, and ye shall find; knock, and it shall be opened unto you." -Luke 11:9
"Hear, O Israel: The LORD our God is one LORD: And thou shalt love the LORD thy God with all thine heart, and with all thy soul, and with all thy might." -Deut. 6:4-5
"For the LORD is our judge, the LORD is our lawgiver, the LORD is our king; He will save us." -Isaiah 33:22
I think people look to politicians to lead Forward, not maintain status quo or return to a past.
The easiest way to lead forward is to spend money - especially when it ain't yours!
Monitary policy and macroecconomics are tough disciplines.
Projecting gold prices are not any easier.
I found the discusions in general reasonable and more free of the philosophical biases that usually color the topic. From an investment perspective it doesn't matter what you want to happen but rather what is likely to happen and when. Unfortunately what needs to be long term policy becomes short term speculation and often in undercapitalized and leveraged positions.
Been there, done that, and not always as successful as anticipated.
Good luck to you experts and hopefuls.