Tuesday, April 19, 2005, 10:29:00 PM EST
Gold and Dollar Market Summary
Author: Jim Sinclair
The US dollar rally and gold’s decline are for all intents and purposes behind us. The words of former Fed Chairman Volcker have been heard so any reconstruction of either of those earlier events is an uphill grind and will not succeed. New highs in gold are in the offing.
Now let’s look at the fundamental dollar facts and use logic - not TA, not top calling or sooth saying - because the US dollar market is the most fundamental on the planet.
The Bernanke Electric Mayhem Money Printing Machine and all its ramifications is the unseen hand behind the PPI. This is not anything that can be called transitory or irrelevant because of violent price movements such as oil. In a nutshell, it is the hidden hand of monetary liquidity that was introduced unconventionally into the marketplace and can not be recovered.
This brand of monetary liquidity was created out of thin air and seemingly fell like manna from the heavens. It poured into the world monetary system with the speed of bank wires from Japan to the New York Federal Reserve as the former intervened in the international currency markets. This is the electronic character of Bernanke’s money printing press.
The mechanics of this type of international monetary liquidity was produced by the purchase of US Treasury instruments all across the maturity spectrum by the New York Fed as soon as each bank wire was received from the Bank of Japan. This liquidity blast was mechanically produced by the management of the Japanese Float account, namely the New York Federal Reserve.
The New York Federal Reserve Bank then bought US Treasury instruments in a 24 hour operation as fast as dollars were produced by the Japanese intervention in the marketplace to maintain an artificial level of the Yen in international markets.
This non-traditional method of expanding international monetary liquidity CANNOT BE DRAINED from the system because you can buy huge amounts of US Treasuries which you can not sell without cremating the bond market. This is true because bonds are always being produced so the supply is theoretically unlimited but demand is not.
This colossal injection of the largest amount of international monetary liquidity that has ever occurred in the shortest period of time is the UNSEEN HAND that will drive inflation up as the US economy rolls over and moves sideways at a high level.
The reason the US economy will not crater is the fiscal stimulation caused by two wars and the monetary stimulation that was created by the above mentioned non-traditional methods.
Corporate profits will, however, crater because costs are going up, money costs more and productivity is headed lower, with consumers less optimistic due to the increased cost of everything including gas.
The decline in corporate and personal tax revenues, with no meaningful decline in expenses, will drive the US Federal budget much higher. The increased size of the US Federal Budget Deficit will cause the US Current Account to rise, making it larger as a percent of GDP. This is how it is factored into dollar valuation.
Let’s face it, the US Current Account Deficit is the speedometer of money exiting the US into international currency markets.
The increased amount of US dollars entering the international currency market as measured by a higher US Current Account Deficit means more US dollar supply in that market. In the end, that means a lower price for the dollar.
The key price now for the US dollar is not at .8000 but at .8250 as it indicates that the USDX is headed into the .70s. That drop will occur when the market expects a consecutive three month minimum period when the inflow of non-US funds into US monetary instruments falls below the US Trade Deficit numbers.
This point is best explained in terms of a family’s inability to borrow to meet their expenses. When that happens, local merchants will no longer extend credit and banks will call in loans.
A nation’s financial health is no different than a family’s. It is the line of demarcation between the assumption of being a “going concern” and a “growing” concern.
At this point gold will, IMO, trade at $529 and has the capacity to move out of a normal bull market into a run away market.
These are the facts that will run over TA and create a shocking rise in gold and a fall in the US dollar. Please re-read the words of Chairman Volcker as you think over all of the above.
Now let look at the key element for timing:
a. The US dollar will drop below .8000 when the market assumes that there is a high probability that the TIC figures, reported as the flow of funds into the US by investors, will be below the three months of US trade deficit. This means in the collective mind of the marketplace that the US can not pay its bills in the normal course of order but must finance internally with all the ramifications implied.
b. When the dollar drops below .8000, the price of gold will reach for $529.
c. $529 is the price that should be considered the maximum in a normal bull market. However, gold may not stop there.
d. What will determine the possibility of gold moving into a runaway condition, which is defined as anything over $529, will be the action of the US dollar after it breaches .8000 - which it will.
an.
