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#1 Chilidawgz

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Posted 07 January 2004 - 03:03 AM

http://www.clivemaun....php?art_id=211

The other and more ominous implication of the rapidly declining US$ will be its potential impact on the real value of US$ denominated securities such as Bonds, Equities and Real Estate. The actual decline in the US$ is offsetting the rise in the DOW, S&P and NASDAQ indices, and the capital value of Bonds. The key issue now is simply how long can the US Federal Reserve continue hold interest rates at 45 year lows before the pressure to raise rates becomes overpowering in the face of a collapsing US currency?

Much has been made in the popular media of the bear market rally in US stocks from last March, with it being hailed as a new bull market – nothing could be further from the truth. All investments must always be considered in opportunity cost terms, and this being so the plunging US dollar must be factored into the equation when evaluating the rally in US stocks. If you are a US investor and you don’t do this, you are just kidding yourself. When priced against the other major world currencies, the performance of the US stockmarket has been nowhere near as impressive as a straight reading of the indices would lead one to believe. Charts in these currencies reveal a mediocre bear market rally, which looks anaemic against the Euro, as shown above.

Obviously, very powerful and enormously wealthy vested interests would like to see current interest rates maintained and the Bear Market rally in the main indices continue until President George W Bush is re – elected. For these combined political and economic interests, it is now a race against time to maintain the status quo come what may. A fundamental change in the movement of interest rates would quite literally unhinge the three pillars of the current “economic recovery”: equities, bonds and property. However, the US may not be permitted to allow to the dollar to go into “free fall” by the rest of the world, as their economies attempt to adjust to rapidly rising labour costs in US$ terms, and as their goods get priced out of the US market. Furthermore, their investments and credit in the US is being constantly devalued, in what is an astonishing exercise in “legalized embezzlement on a monstrous scale”. Unfortunately, this is a game in which the entire world now stands to lose and there is no way out, as every exporting nation is dependent on the US economy and the credit – refinance funded US consumer. However, this consumer is now “maxed out” and virtually saturated with easy credit with little or no savings left to spend. Price inflation in the USA will run into overdrive, as the higher cost of imported goods feed through to the high street throughout 2004, and the basic costs of living soar in terms of medical insurance, energy, fuel and staples. The Feds money printing presses are running virtually flat out to fund what is nothing other than a sham recovery.

This is without all doubt the greatest bubble or collection of inter-related or interlocking bubbles the world has ever seen in both scale and extent. The US$ needs foreign investors and Government financing at the incredible rate of US$ 2 billion per day to fund the exploding US deficit. Just how long this scenario can be sustained will be fascinating to watch. In the background, and largely unmentioned by the mainstream media, is another little “Nest Egg” waiting to hatch for Fed, the multi – trillion dollar derivatives time bomb. To cap the entire “Hollywood Blockbuster Scenario” developing for 2004 - 2005, these bubbles are all sewn together with the US$, the global currency since 1945, the “master ring” that binds all US trading partners to their collective fate. No one in Hollywood would ever have conceived a script to beat this one. One is left to ponder why highly educated and intelligent people could have allowed such a situation to develop, and the lessons to be learned.

So, given all of the foregoing who will be the first to be chicken? Who will be the first to bail out of the unsupported, un-backed and all but abandoned (Mr. Greenspan stated in November 2003 that, quote, “I foresee no need to raise interest rates until well into the New Year”) US dollar? The collapse, when it comes, will be global, and on a scale hitherto unseen and unimaginable. Such an huge economic re – adjustment will ultimately affect all the world’s economies and currencies. At, or, more likely, before this point is reached, gold, silver and platinum will, by any standard of reference, go into a bull market of unprecedented scale, as most other investment vehicles will be in sharp or even precipitate decline.

The point at which gold rises against all currencies, and not only the US$, will mark Phase 2 of this bull market, where precious metals will go into an accelerated ascent, and the scramble for physical metal and precious metal mining stocks will become truly global. This point will come when then interest rate differential between currencies closes to produce "a level playing field for the US$". Having said this, it has to be remembered that the SA Rand and Australian dollar are minor currencies when compared to the US$. The demand for these currencies increases when commodity prices rise, and demand for such commodities in these economies also rises.

South Africa is the world's largest producer of diamonds, gold, platinum, vanadium and chromite. Australia is the world's largest producer of iron ore, lead and zinc and is a major producer of nickel and gold. All these commodities are experiencing a boom. Hence demand for Rands and Aus $'s is high on international markets regardless of interest rate differentials. This forces these currencies to rise more than would otherwise have been the case.

In the case where the Fed commences raising interest rates, initial rate rises are likely to be of the order of 25 basis points. This will have little or no impact on the gold market. If the decline in the US$ is not arrested, more severe interest rate rises will be required, and in rapid succession, to restore confidence. There will come a cross over point where the dollar ceases to fall and the brakes are put on gold’s relentless rise. Where and when this point will come no one can predict. However, it seems pretty obvious that gold will surpass its 1980 peak of US$ 850 per fine ounce with consummate ease.

Given the massive and ballooning US debt position, and economic structural imbalances, it is likely that this cross over point will be at interest rates of well over 10%. However, the longer the Fed postpones "the evil day" when it has to address the debt / dollar issue the chances of a hyperinflation scenario increase. The social consequences of the foregoing, given the current unprecedented debt exposure of US corporate, public and private sectors, are expected to be serious, possibly calamitous for some organisations and individuals. However, whichever way one cuts the cake, the precious metals market has a long way to go yet, and for those who have had the prudence to position themselves and thus also protect themselves againsts the ravages of inflation, the gains could be enormous.
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#2 Porter

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Posted 07 January 2004 - 08:54 AM

If anyone has access to the information, I would like to see what the DAX and CAC look like in dollar terms. That is to say I would like to see a chart of DAX/DX and CAC/DX or DJEuropean/DX. I suspect those charts would look bullish. Porter