GDR ii
Gold & US$
Eric Hommelberg
March 28, 2005
 Gold &
US$ is chapter II of the Gold Drivers Report 2005. It discusses
the forces dragging down the US$. The US is facing a Current
Account Deficit exceeding 6% of GDP which raises many alarm bells.
The US economy is addicted to an inflow of $2 billion dollars
every single working day. This is simply not sustainable since
it requires almost 80% of world savings. FED officials are pointing
towards a lower dollar. Foreign Central Banks just started selling
US dollars in order to diversify its currency reserves. A Dollar
devaluation seems to be inevitable and is very Gold friendly
since Gold is still a monetary asset and trades like a currency.
If the Dollar goes so will Gold but in opposite direction.
The 30-year long-term chart [right] says it all. A falling
dollar will prop up the price of Gold. OK you'll say but why
should the dollar fall? Didn't Dick Cheney said that deficits
don't matter and that the world is happy to finance these deficits?
Sure he did, and yes, it wasn't
and still isn't in the interest of the Asian countries to see
the dollar crashing. It would severely hurt their own economies
but a simple calculation learns that the dollar simply has to
fall. Again, in order to finance the current account deficit
an inflow of about $2 billion is required every single working
day. This is about 80% of world savings. You don't have to be
a genius in order to understand that this can't go above 100%
and we're getting close to that at an alarmingly high speed.
That's why FED officials are pointing towards lower dollar levels
down the road: President of the Dallas Fed, Robert McTeer is
straight forward. He said:
"over time, there
is only one direction for the dollar to go - lower." END.
So what about other officials
on the US$, do they agree with the President of the Dallas Fed?
And if that's the case shouldn't we see some evidence of Central
Banks diversifying out of the dollar? And does a growing current
account deficit really matter? Let's focus on the following issues
here:
1. Growing Current Account
Deficit: Does it really Matter?
2. Others on the US$ and Current
Account Deficit
3. Central Banks diversifying
out of the US?
1 - Growing Current Account deficit:
does it really matter?
The current account deficit
is approaching 6% of GDP which raises many alarm bells since
many analysts see this as a threshold whereby the classic current
account adjustment process will be triggered characterized by
a weaker currency. (see Caroline L. Freund, "Current Account
Adjustment in Industrialized Countries," Board of Governors
of the Federal Reserve System International Finance Discussion
paper #692, December 2000). This thesis is supported by the fact
that at present 70 - 80% off all world's savings is required
(inflow of 2$ billion dollar every working day) in order to sustain
current dollar levels. Needless to say this can't continue for
much longer. As former Fed Chairman Paul Volcker says:
"the United States economy
is growing on the savings of the poor A big adjustment will inevitably
become necessary."
So when will this end? When
are foreigners going to stop acquiring ever increasing quantities
of US dollars? Isn't the FED worried about the huge current account
deficit? And what about other officials? What do they have to
say?
2 - Others on the US$ and Current
Account deficit
After many years of denial
Alan Greenspan finally agrees that the huge current account deficit
really matters. On November 19, 2004 he said:
Alan Greenspan - US Needs
to Cut Budget Gap -
"Current account deficits,
even large ones, have been defused without significant consequences,
(but) we cannot become complacent," Greenspan said in remarks
prepared for delivery to a European bankers conference in Frankfurt.
END.
So by saying "we cannot
become complacent" Greenspan admits that huge Current Account
deficits really matters.
Former ECB president Wim Duisenberg
ishares the worry regarding the tremendous Current Account Deficit.
He was quoted by Spanish Newspaper El Pais, he said:
Wim Duisenberg - Former
ECB President -
"A dollar devaluation
seems inevitable due to the tremendous US Current Account deficit."
END.
Morgan Stanley's Stephen Roach
seems to agree with Greenspan and Duisenberg:
Stephen Roach - Morgan Stanley
-
The enormous US trade deficit
should be a wake-up call to America and the rest of the world.
It is a direct manifestation of a lopsided global economy that
remains biased toward unprecedented external imbalances. As long
as the US continues to live well beyond its means and as long
as the rest of the world fails to live up to its means, this
seemingly chronic condition will only get worse. The imperatives
of global rebalancing are reaching a flashpoint. END
A few more worried people:
The world's second richest
man Warren Buffett is losing confidence in the dollar:
Buffett says he is losing faith
in the soundness of U.S. currency as an investment vehicle because
the United States is running a huge trade deficit -- close to
$500 billion, and rising rapidly -- that is causing income to
flow out of the country at such a rapid rate that it will soon
become unsustainable. END.
Rubin: Dollar Decline Could
Accelerate
NEW YORK - Former U.S. Treasury
Secretary Robert Rubin warned Monday night that the dollar's
recent decline could accelerate and interest rates could rise
if politicians in Washington don't act quickly to narrow the
federal budget deficit. END.
Nicolas Sarkozy - Former
French Finance Minister -
"U.S. deficits which are
forcing the dollar down were more a reason for concern than the
rise of the euro." "The markets are worried by the
strong U.S. current account deficit." END.
Not only the World's second
richest man is losing faith in the dollar but joining him now
is the World's richest man:
Bill Gates, World's Richest
Man, Bets Against Dollar
Jan. 29 (Bloomberg)
-
Bill Gates, whose net worth
of $46.6 billion makes him the world's richest person, is betting
against the U.S. dollar.
"I'm short the dollar,''
Gates, chairman of Microsoft Corp., told Charlie Rose in an interview
late yesterday at the World Economic Forum in Davos, Switzerland.
"The ol' dollar, it's gonna go down.''
"It is a bit scary,''
Gates said. "We're in uncharted territory when the world's
reserve currency has so much outstanding debt.''
Gates's concern that widening
U.S. budget and trade deficits are undermining the dollar was
echoed in Davos by policymakers including European Central Bank
President Jean-Claude Trichet and German Chancellor Gerhard Schroeder.
END.
Then out of the blue a few
very strong warnings came out again from former chairman of the
FED Paul Volcker, his successor Alan Greenspan and again Warren
Buffett who said:
Paul Volcker - former FED
Chairman - At a conference recently held at the Stanford Institute
for Economic Policy Research
"Below the favourable
surface [of the economy], there are as dangerous and intractable
circumstances as I can remember.... Nothing in our experience
is comparableBut no one is willing to understand [this] and do
anything about it"
"We are consuming about
six per cent more than we are producing. What holds the world
together is a massive flow of capital from abroad it's what feeds
our consumption binge... the United States economy is growing
on the savings of the poor A big adjustment will inevitably become
necessary, long before the social security surpluses disappear
and the deficit explodes."
"We are skating on increasingly
thin ice." END.
Greenspan sounds warning
on US deficits Consequences `could be severe,' Fed chief says
Mar 3, 2005
Debt worries clouding outlook
for economy
WASHINGTON-U.S. Federal Reserve
Board chairman Alan Greenspan issued one of his toughest warnings
yet to Congress yesterday about the danger of letting the country's
giant budget deficits persist, saying "the consequences
for the U.S. economy of doing nothing could be severe."
END.
Buffett deepens dollar worries
March 05, 2005
"Warren Buffett has warned
that the US trade deficit risks creating a "sharecropper's
society" as his letter to shareholders sounded an increasingly
bearish tone about the value of the dollar."
"Mr
Buffett's bet against the dollar also grew. Foreign exchange
contracts - mostly short positions against the US dollar - nearly
doubled over the year to $21.4bn, generating $1.8bn in gains
as the greenback fell against other major currencies."
"Mr Buffett stepped up
his warning about the US trade deficit and the need to finance
it with foreign investment, devoting more than two full pages
of the annual report to the topic." END.
Greenspan again:
Greenspan: Budget Deficits
Pose Big Threat
Washington Mar 10,
2005
On trade, Greenspan expressed
hope that further declines in the value of the U.S. dollar would
narrow the trade deficit, which mushroomed to an all-time high
of $617.7 billion in 2004.
A weaker dollar makes U.S.
exports less expensive to foreign buyers and thus more competitive
on overseas markets. A weaker dollar also can raise the prices
of imported goods flowing into the United States. END.
Let's repeat one sentence here:
"Greenspan expressed
hope that further declines in the value of the U.S. dollar would
narrow the trade deficit."
To me it sounds that a further
decline in the dollar is considered as a given fact!
But what about CB intervention
in order to prevent a dollar decline? The ECB is getting nervous
and describes the recent rapid rise of the Euro as being 'brutal'.
So they don't seem to be very pleased with a steady dollar decline.
Are they going to intervene? Will they be successful?
As said before you can't manipulate
a currency against its primary trend for a long period of time.
In a question and answer period after his speech, Greenspan said
last year:
Alan Greenspan:
November 19, 2004
Central bank intervention in
currency markets to support the dollar -- such as through buying
dollars to drive up its exchange rate -- could have only a limited
and short-term effect. END.
Also the US government made
it clear that they won't join any kind of intervention effort
in order to stop the dollar decline.
With all these kind of bearish
news coming out lately when it comes to the dollar, you may wonder
why only so very few picked upon it during last couple of years.
Why didn't we hear these kind of warnings before? Why didn't
others warn for things to come some years ago? The dollar decline
is already THREE years underway!
Well, as said before denial
was the tune of the day. When investment gurus like Warren Buffett
were betting against the dollar in 2003 analysts were saying
that the old man had lost his touch with the markets. Some esteemed
Gold Gurus's like Jim Sinclair and James Turk were calling for
a top in the US$ years ago and time has proven them right. Jim
Sinclair was among the first currency traders who called for
a confirmed top in the dollar back in 2002. (The Millennium transition
- Gold From Commodity to Currency). Ever since then he has warned
for the triple deficits - current account, trade and federal
budget. But also from the White House itself there were few who
recognized what was coming but unfortunately their voices weren't
being heard. Just look at what former White House Economic Advisor
Dr. Lawrence Lindsay had to say years back in 2001:
Dr. Lawrence Lindsey, Former
White House Economic Advisor
April 30, 2001
"I do think it is important
that we all keep this in mind: we have had 20 years of expansion
- 18 actually, going on 19. And it has been an extraordinary
period. But that does not mean that everything is AOK"
"We are in uncharted territory
- - it's unprecedented - - it cannot go on - - something has
to give."
"it is unlikely that we
could forever borrow 4% of GDP from the rest of the world. Or
more precisely if you look at trends, we are borrowing increasing
amounts from the rest of the world. Imagine going to your banker
and saying "we thank you very much for the $280 (billion)
you lent us in 1999, and the $400 (billion) you lent us in 2000,
and it looks like this year it is going to come in about $520.
We are going to need $650 in additional cash in '02, probably
$800 in '03." Getting the picture? This is otherwise known
as "evergreen" financing. And it won't work. At some
point, it is going to have to be adjusted." END.
Now many years later it seems
to be more accepted these days that the huge current account
deficit of the US is a worry indeed and as said before it requires
an inflow of about $2 billion dollars each working day in order
to finance these deficits which in turn requires about 80% of
world savings. So what if other central banks start slowing down
their purchases of US paper, wouldn't that force the dollar down?
Isn't that what the FED is afraid of? Well, it seems they are:
NY Fed-Slower Cenbank Buying
Would Hit Dlr, Rates
NEW YORK (Reuters) - U.S. interest
rates would rise and the dollar would fall if Asian central banks
slowed their recent heavy purchases of U.S. assets, the New York
Federal Reserve warned in a report on Thursday. END.
It seems that foreign central
banks not only are slowing down their dollar purchases but started
diversifying out of the dollar as well. Just read the following
headlines and judge yourself:
3 - Central Banks diversifying out
of the US$?
The US government still insists
that concerns regarding Asian Banks selling dollars are misplaced.
Treasury Undersecretary for International Affairs John Taylor
told Dow Jones (Mar 11, 2005):
"There is no evidence
we have seen that Central Banks are changing their portfolio
proportions." END.
Well, maybe Mr Taylor doesn't
read Newspapers, it's just too hard not to disagree with Mr.
Taylor after reading the following headlines:
Financial Times
Dollar expected to fall amid China's rumoured selling
November 7, 2004
China, which has $515bn of
reserves, was also said to be selling dollars and buying Asian
currencies in readiness to switch the renminbi's dollar peg to
a basket arrangement, something Chinese officials have increasingly
hinted at. Any re-allocation could push the dollar sharply lower.
END.
XIANGGANG Hong Kong (Itar
-Tass)
November 8, 2004
By selling U.S. dollars, securities
and assets denominated in the U.S. currency, Russia is diversifying
its currency reserves, which is in line with the policy pursued
by the Central Bank of Russia, Andrei Illarionov, adviser to
the Russian President on economic problems, told Itar-Tass on
Monday. END.
The New York Times
November 16, 2004
"The United States is
spending nearly $600 billion more a year than it produces, almost
6 percent of its annual gross domestic product. Much of that
spending has been financed by Asian governments, which bought
more than $1 trillion in Treasury securities and other dollar
assets in the last two years to help keep the dollar strong against
Asian currencies.
Many analysts expect the financing
gap to widen and the dollar to decline further." END.
Financial Times
Dollar Down as Moscow trails Case for Euro
November 24, 2005
"The dollar hit an eight-year
low against European currencies on Tuesday as a senior Russian
official said Moscow might increase the proportion of its foreign
exchange reserves held in euros."
Hans Redeker, head of currency
strategy at BNP Paribas, said: "The Russians are saying
they don't see the potential for a rebound of the dollar."END.
China Has Lost Faith in
Stability of U.S. Dollar, Top Chinese Economist Says at World
Forum
January 26, 2005
"DAVOS, Switzerland (AP)
-- China has lost faith in the stability of the U.S. dollar and
its first priority is to broaden the exchange rate for its currency
from the dollar to a more flexible basket of currencies, a top
Chinese economist said Wednesday at the World Economic Forum."
"The U.S. dollar is no
longer -- in our opinion is no longer -- (seen) as a stable currency,
and is devaluating all the time, and that's putting troubles
all the time," Fan said, speaking in English." END.
Financial Times
January 24, 2005
The Bank of Thailand said this
month it was considering reducing the proportion of its $50 billion
reserves held in dollars from 80 percent to 50 percent.END.
Dollar Declines on Report
Korea to Diversify Currency Reserves
Feb. 22 (Bloomberg) -
"The dollar fell the most
against the euro in more than a week and dropped versus the yen
on a report that Korea's central bank will diversify its currency
reserves."
Almost 70 percent of the 56
central banks surveyed said they increased exposure to the 12-nation
currency, according to the survey conducted by Central Banking
Publications Ltd., a London- based publisher, between September
and December 2004. Fifty-two percent said they reduced exposure
to the dollar." END.
Another upbeat note on the
dollar from Australia:
The Australian
February 25, 2005
"Treasurer Peter Costello's
closest adviser fears the US is heading for a devastating financial
crash that could ravage Australia's economic growth."
"The financial crash feared
by Dr Henry would involve a sharp fall in the US dollar and a
bond market selloff, which would push up US and world interest
rates." END.
Japan the next to diversify?:
Dollar Declines After Koizumi
Says Japan May Diversify Reserves
March 10, 2005
The dollar dropped against
the euro and the yen in Asia after Prime Minister Junichiro Koizumi
said Japan "in general'' needs to consider diversifying
the investment of its foreign reserves. END.
And then China again. Their
rumoured selling turns out to be not a rumour at all:
China Reduces Dollars in
Reserves, Increases Euros, Lehman Says
March 11, 2005
China's central bank cut the
share of its currency reserves held in dollars and raised its
holdings of euros, according to an estimate by Lehman Brothers
Holdings Inc. END.
So after all we see that the
Russians don't see the potential for a rebound of the dollar.
Neither do the Chinese, the Koreans, the Thais, the Australians,
the Japanese and fifty-two percent of all central banks. Is it
any wonder that Alan Greenspan, Robert McTeer, Wim Duisenberg,
Bob Rubin, Warren Buffett, Stephen Roach, Bill Gates, Paul Volcker,
etcall have a cautious long-term view on the dollar?
Again and again former politicians,
Fed officials and high profile investors are projecting a sober
outlook for the dollar caused by the ever increasing Current
Account deficits so a further decline seems to be unavoidable
coming years. Let's repeat once more Alan Greenspan's remark
on the dollar and deficits:
"Greenspan expressed
hope that further declines in the value of the U.S. dollar would
narrow the trade deficit." END.
Again this sounds to me as
if a further dollar decline is considered as a given fact. The
end result could very well be a race for the dollar door. Bridgewater
Associates reported:
The Break Down of The Dollar
System
March 10, 2005
In the early 70's, France first,
and then other countries, started to peel off the dollar standard
and started to ask the Fed for gold instead of dollars. The result
was inevitable as the race for the dollar door began. In the
last couple of weeks the exact same dynamic began anew as Korea,
then China and Thursday Japan, all expressed their interest in
diversifying their dollar holdings. The race to the door is likely
about to begin. END.
The message from al the quotes
above should be clear and is straightforward:
The sky-rocketing current
account deficit will force the dollar lower and could lead to
a race for the dollar door.
Former Assistant Secretary
of the Treasury in the Reagan administration Paul Craig Roberts
said seems to agree:
Counter-punch
So Much for the New Bush Economy
Paul Craig Roberts
March 10, 2005
The dollar's value and status
as reserve currency cannot forever stand the trade and budget
deficits that are now part and parcel of America's economic policy.
Unless there are major changes
soon, America's economic future is a third world work force with
a banana democracy's worthless currency. END
It goes far beyond the scope
of this article in order to explain what causes the growing deficits
and how they interact with the dollar. For the Gold investor
it only matters that growing Current Account deficits really
matters and that it eventually leads to lower dollar levels.
As the dollar goes so will Gold but in opposite direction.
Highlights:
- Current Account deficits exceeding
5% of GDP raises many Alarm Bell
.
- US economy is addicted to
an inflow of $2 billion dollars every single working day. This
is simply not sustainable since it requires almost 80% of world
savings
.
- FED officials are pointing
towards a lower dollar
.
- Foreign Central Banks just
started selling US dollars in order to diversify its currency
reserves
.
- A Dollar devaluation is very
Gold friendly since Gold is still a monetary asset and trades
like a currency. If the Dollar goes so will Gold but in opposite
direction.
Total US Debt & Exploding Trade
Deficits
As said before it goes far
beyond the scope of this article in order to explain what causes
the growing Current Account deficits and how they interact with
the dollar. However I do think it's important to discuss just
a few items regarding total US debt.
Former IMF consultant and Financial
Sector Specialist of the World Bank Richard Duncan describes
in detail (Richard Duncan: The Dollar Crisis - Causes Consequences
- Cures) how the US economic growth of the last 20 years
has been fueled by credit (Thanks to Alan Greenspan who made
easy credit available by lowering interest rates to a 40 year
low thereby encouraging consumers to take out cheaper mortgage
loans and to spend spend spend spend...) thereby creating a total
US debt exceeding 340% of GDP (see chart below).
The chart on the left shows
a total US Debt exceeding 340% of GDP. It's obvious that the
US is getting more dependant on more debt in order to sustain
economic growth.
The chart on the right shows
an obvious trend. A trend of US consumers buying tons of cheap
foreign manufactured goods which in turn leads to higher trade
deficits and therefore higher current account deficits. The current
account deficit is approaching 6% of GDP which raises many alarm
bells since many analysts see this as a threshold whereby the
classic current account adjustment process will be triggered
characterized by a weaker currency.
If a total Debt of 37$ trillion
wasn't already bad enough, what about future fiscal liabilities
exceeding $50 trillion? Peter Peterson, secretary of commerce
during the Nixon administration and Prof. Laurence Kotlikof,
senior economist at the President's Council of Economic Advisors
(CEA) during the first Reagan administration, published excellent
books ("Running on Empty," "the coming Generational
Storm") in which they explain in greatest detail why the
US is heading towards bankruptcy. They project a fiscal liability
of more than 50$ trillion which requires a budgetary resource
that only inflation can provide. Inflation and higher rates to
come? How does that interact with Gold? Well, that's food for
thought for next chapter Gold & Inflation. Negative real
rates.
March 26, 2005
Eric Hommelberg
email: ehommelberg@golddrivers.com
website: www.golddrivers.com
NOTE: Readers interested in future GDR updates can drop
a mail here.
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