Blue in the face. . .
I've talked about the dollar until I'm blue in the face. After all, most of what we own and all of what we work for -- is denominated in those Federal Reserve Notes that we call dollars. Make no mistake about it, the dollar is a "fantasy currency." There exists no definition of the dollar. The dollar today can only be defined in its relationship with other currencies. A dollar is worth this much in terms of euros, a dollar is worth this much in terms of yen.
All right, then what makes the dollar worth anything at all? Confidence and custom. The world is accustomed to accepting dollars, and the world still has confidence in the United States. Furthermore, the central banks of the world are accustomed to accepting US dollars as the world's reserve currency -- although confidence in the United States is fraying a bit. My old friend, Doug Casey calls the dollar "the unbacked liability of a bankrupt nation." How can he say that?
Lets examine what's going on. The US is now the world's largest debtor. This nation is swimming in debt. The buying of US consumers comprises 70 percent of the Gross Domestic Product of the US, and the US consumer is now spending more than he's earning. The savings rate of the US consumer has now gone negative -- minus 0.60 percent.
But how about the government? Consider the national debt of the US, which is now pushing $8 trillion. The following are increases in the national debt that have been mandated by Congress. In 2002 the increase in the national debt was $450 billion. In 2003 the increase rose to $984 billion. In 2004 the increase was $800 billion. This year, in 2005, the House passed an increase of another $781 billion, although the Senate has not yet acted on this. In other words, in the last four years the increases have totaled $3 trillion, which amounts to an increase of 50 percent in the total national debt.
But the increases go on. The wars in Iraq and Afghanistan are costing roughly $5 billion a month. Now we have the New Orleans disaster. So far, President Bush has asked Congress for $10 billion and then another $52 billion, and the bills just keep coming in. Some estimates are that hurricane Katrina will cost $120 billion or more before it's all over, and this is probably conservative.
All the above, then, constitute the background for the dollar. Can the steady build up in debt inspire confidence in the dollar? I don't see how it can. My guess is that an increasing number of countries are going to "get around" receiving dollars by asking for payment in the form of a basket of currencies. This means that these nations are moving to disconnect themselves from the dollar. The dollar alone will not suffice for payment.
Even a hard-nosed, sophisticated investor like Warren Buffet has moved to diversify out of dollars. To do that Buffet has made a $22 billion bet that the dollar is fated to decline big time. Buffet wants to offset any dollar losses with profits in his non-dollar position.
What I've written above represents the big unspoken background for investing. It's really a sad story. It's sad when you have to worry about your own country's currency. It's hard enough to pick stocks or investments that you think are going to work, but when your nation's currency itself is under suspicion, then nothing is safe, nothing is easy, nothing is a sure thing long-term "investment."
Ah, but why worry, why try to use a "monetary crystal ball." Heck, we've got the charts. So saying, let's take a look at the Dollar Index. Below we see a daily chart, and you have to remember, this is a chart of the US dollar in terms of a basket of currencies. The chart shows the Dollar Index looking as though it has topped out, but now pulling back or even slightly above its "support," which is the horizontal blue line.
The weekly chart of the Dollar Index below gives us a better and more important perspective. Here we see a series of three tops, each top below the preceding top. At the bottom of the chart MACD has been helpful in calling the turns, and the latest down-arrow appears to be calling for a further decline to a potential oversold low -- we're not there yet.
But the Dollar Index compares the dollar to other fiat currencies. In other words, it's comparing paper with paper. What about comparing the dollar will real money -- gold? That's what the chart below does. Here we see gold in terms of dollars.
The "battle of gold" has been long and arduous. The central banks want to control the world's money, and gold (real money) is in their way. Therefore, the central banks have fought gold both economically and psychologically. They've fought gold economically by periodically selling portions of their gold holdings. They've fought gold psychologically by implying that fiat money is real money and gold is "an ancient relic." This "war against gold" worked for many years, but it stopped working around 2001-2002. It stopped working when smart money started accumulating gold when the metal got down to absurd prices around 250 dollars to the ounce.
Since then gold has laboriously climbed, layer by layer, level by level. Which is what we see on the daily chart below. I have delineated the two most recent layers with horizontal blue lines. The latest layer is bounded by 420 (dollars) on the bottom and 458 at the top. There is an inner layer of 450 which gold will have to clear. As I write, gold has climbed to the vicinity of 450, and now it's a question of whether spot gold can climb above 450 and stay there. If so, gold will probably try for the top of the layer which is at 458.
So as you can see, gold's climb, so far, has been difficult -- it's been a battle against the gold banks and the central banks, it's been an advance inch by inch, foot by foot, yard by yard. This is because gold is now in the second phase of its bull market. This is the phase where the public slowly enters the market, it's the phase where the big money is still moving into the market. The second phase is the longest phase of a bull market, and it's usually marked by many corrections against the main bull trend.
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