The Three Stages of a Dollar Collapse
& Steven McIntyre
We thought it might be useful to readers to lay out the various stages of dollar collapse we see coming down the pike. In particular, we will be looking for three divergences in the coming months as signals that the dollar collapse is strengthening and that the gold/silver bull market (still in its early innings) is gaining recognition by the masses, which will propel the yellow and gray dogs even higher. We will hit the highlights of these divergences in an effort to get them on everyone's radar screen. The clear completion of each divergence should be viewed as bullish milestones for the metals.
Divergence One: Gold/Silver to Outpace Foreign Currencies
However, the European Union is again showing signs that at the $1.30 level, their monetary leaders will grab the megaphone and try to talk the Euro down or at least slow its rise. Witness recent comments from European Central Bank head Jean-Claude Trichet, commenting that recent Euro vs. Dollar moves have "tend[ed] to be brutalbrutal moves [are] not welcome." The rest of the talking heads in the Euro zone have echoed Trichet's whining last week. The last time the chorus wrung their hands this loudly, the Euro retreated from $1.29 to $1.16; this time we suspect the market will be wise to the boys crying wolf and the gravity of the dollar's fundamentals will push the dollar even lower and the foreign currencies to fresh new highs.
Interestingly, we believe that even though foreign currencies will make new highs against the dollar, they will begin to drastically underperform gold. The value of gold in foreign currencies will rise, sparking even more buying around the globe as gold is the one asset that is no one else's liability. Unlike its fiat brethren, no weak monetary heads will be complaining about the rise of gold. Sure some central banks will continue to sell gold, but we suspect that as gold becomes their best performing reserve, central bank selling will dry up as well.
The preservation of purchasing power that gold (and silver) offers will again become clear to a nation of investors, which when coupled with the soon to be live gold ETFs, should spark a continuation of the spectacular rally in gold that began in 2001. Non-U.S. dollar currencies will do well, but in the end, they face many of the same economic problems that the U.S. does and as such will be far more earth-bound than the precious metals.
Look for the outperformance of gold versus foreign currencies in the next leg of the dollar decline.
Divergence Two: Gold/Silver to Outpace the Base Metals
The fact that base metals have rallied just as strongly (if not more strongly) than the precious shows that a good deal of the broad metals' appeal over the last couple of years is based on the belief that the emerging industrial powerhouse - China - will suck up all of the world's commodities. There is some truth to that and a lot of base metals were bouncing off depressed levels, but in the end, they are plays on continued robust growth in the world's economy in the next couple of years - something we would not want to bet on. Besides, anecdotal signs point to overcapacity on the horizon in China - at least in the short run.
In the weakening economy/stagflation type of environment that we envision, the desirability of buying base metals as a "robust world industrial economy and China play" is zilch. As such we expect to see the new buyers of gold and silver that will push them to higher levels will not be blanket metal buyers searching for a China play, but rather those that sense the world's fiat currencies are undesirable stores of purchasing power in the current environment.
As the world's economy slows, look for gold/silver to diverge on the upside from base metals as the monetary nature attracts legions of investors.
Divergence Three: Silver to Outpace Gold
From the two charts below you can see that silver is up 90% to date from its low while gold is up the aforementioned 68%. The two metals have basically moved in tandem to date.
Initial flows out of the dollar will likely find gold to be the easiest non-fiat platform to store wealth. Likewise, the gold ETF will be approved before the silver ETF and will likely help the yellow metal attract the media and individual investors' attention. Silver may well lie below the radar for awhile longer, but eventually its supply/demand picture coupled with its own ETF could propel it to incredible heights.
Please note your authors are long gold and silver and foreign treasury bills, so you should take our opinions with a large grain of salt, given our bias. As the dollar collapse continues, we will be looking for these three divergences: 1) gold outpacing foreign currencies; 2) precious metals outpacing base metals; and 3) silver outpacing gold as all healthy developments in a vigorous and intensifying bull market for Larry Kudlow's "barbaric" relics.
November 16, 2004
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