Gold believers wage war against dollar

SAN FRANCISCO (CBS.MW) -- Give the gold bugs credit, they know a theme when they see one.

Gold's believers, some of them held in high regard in financial circles, this week are waging all-out war against the dollar, which they sense is close to a decline of epic proportions.

RBC Global Investment Management Inc., a division of Royal Bank of Canada, said in a research report, "The U.S. dollar has been levitating for a long time, but the underlying fundamentals continue to erode. The U.S. current-account deficit exceeds $400 billion annually, and the continuation of this chronic deficit has turned the U.S. into the world's largest debtor as most of these deficits are being recycled into U.S. debt instruments. Gold is already in a bull market in U.S. dollars, and an established bull market in every other currency. If the reserve currency, the U.S. dollar, falters, gold could well be launched on the upside as people recognize its status as the only true currency."

Others are seizing on news of a record high U.S. trade gap and a decline in overseas buying of American securities as powerful ammunition for this year's gold rally. The euro is at a two-year high vs. the dollar, fetching more than 96 cents and up 10 percent so far this year. Gold's price is up 19 percent since Jan. 2. See CBS MarketWatch on the trade and current account reports.

"Borrowing U.S. dollars and investing in foreign assets must be the next big play. Some of them will even figure that the big winner in this whole situation will be gold as it is the ultimate money, the final store of value," observes Alf Field at 321gold.com, one of many pro-bullion news services promoting the current gold rally. "Most other currencies are suspect because they are all worthless paper."

Barry Cooper, a gold equities analyst at CIBC World Markets in Toronto, says each 1 percent move higher for the euro against the dollar will translate into a 1 percent gain for gold. If the euro reaches $1, then gold, reflecting a worldwide retreat from American assets, will move to $345 an ounce, Cooper says. That, the analyst said, will lead to a 25 percent gain in the prices of gold mining stocks, the strongest gainers in the U.S., Canadian, Australian and South African stock market this year. See Cooper's analysis.

For the gold newsletters, the dollar story is one they have been telling, to deaf ears, for years as the dollar soared and gold languished. "Gold is heading much higher, and it is being driven by the very factors that we've been talking about for years, including a basic supply/demand imbalance ... major downtrends in other asset classes and the beginning of a secular bear market in the U.S. dollar," says Brien Lundin of Jefferson Financial's 31-year-old Gold Newsletter in Jefferson, La.

The folks at Gold Anti-Trust Action Committee Inc. say investment banks are starting to understand the panel's sole complaint: that central banks have employed a strong dollar and rigged gold sales to depress the price of bullion - all in an effort to moderate inflation and keep worldwide fiscal turmoil at bay.

"The establishment in the gold world is coming around to our central premise: that central banks and particularly the U.S. Treasury Department have been colluding surreptitiously and desperately to suppress the gold price and manipulate the gold market," Chris Powell, secretary/treasurer of the Gold Anti-Trust Action Committee, told his members.

Also taking it on the chin is the U.S. stock market, seen as past its prime and the subject of scorn from once-adoring overseas investors. Overseas investors rang up a mere net $17.6 billion of U.S. stock-market purchases in the first quarter vs. $41.7 billion in first-quarter 2001.

William Rees-Mogg, editor of the forthcoming book "The Case for Gold," recently wrote in The Times of London, "The price rise in gold is telling us the truth, not about gold, but about the U.S. dollar. The U.S. external deficit has to be reduced. That means the dollar has to fall further. There is no early prospect of a return to confidence in the U.S. stock market. There is no point in the U.S. raising interest rates, which would weaken the U.S. economy and only postpone the necessary realignment of dollar exchange rates. Gold will continue to out-perform stock markets, as it has for the past two years. Pension funds are going to be in serious difficulties."

Rees-Mogg, a successful British investor, newsletter editor and prolific financial author, went on to say, "All of this does not look like a short-term adjustment. We may find the decline of the dollar is the most important global movement of the decade."

The price of spot gold Friday morning was up 50 cents at $324.20 an ounce. The euro was up 0.6 percent against the dollar, reaching the 97-cent mark.

Stock Market Update

06/21 15:45
U.S. Stocks Fall, Send S&P 500 to Biggest Three-Day Loss Since September
By Perri Colley McKinney

New York, June 21 (Bloomberg) -- U.S. stocks tumbled, pushing the Standard & Poor's 500 Index to its steepest three-day drop since the aftermath of the Sept. 11 terrorist attacks. Benchmark indexes slid for a fifth week.

Drug shares led the decline after the Wall Street Journal reported that Merck & Co. boosted revenue with accounting methods not used by its rivals. International Business Machines Corp. slumped after the third Wall Street analyst this week said its earnings will fall short of forecasts.

The 15 biggest U.S. companies fell, reflecting a weaker-than- expected rebound in corporate profits, concern over the prospect of more terrorism and what President George W. Bush called an ``overhang of distrust'' after Enron Corp.'s collapse.

Snip

Note that today was also triple witching where stock-index futures, index options and options on stocks all expire on the same day. This usually results in more volatility.

IMHO, until this administration gets rid of any lingering fears resulting from potential terrorist attacks, we may see more bad financial news continue to come. The asset markets are more dependent on emotion than hard numbers. (A good read on the mentality is Mackay's "Extraordinary Popular Delusions and The Madness of Crowds").

As long as the government insists on window dressing as opposed to really going after what terrorists may exist in this country already (or are continuing to arrive), people will be apprehensive about the future. When people see the almost daily murderous attacks taking place in Israel and then hear about possible "dirty bombs" here they become apprehensive. (Also, today they announced that they think an attack may be planned in Vegas on July 4, yesterday some MEs tried to buy a replic ambulance, and today warnings about fuel trucks might be turned into bombs to be set off in Jewish neighborhoods) This mentality will carry over into their investment patterns.

Also, as more of these high profile news stories keep breaking about corrupt company execs, people will not trust what numbers do exist. The combination of these two phenomena are not conducive to investing.

Once the Euro and Dollar are even, and the Europeans start paying for their own version of NATO (60,000 man defense force); the trade inbalance with go way down.... Europe has pushed the Dollar hard, but with the inflation of the Euro this 1-to-1 ratio may pass by end of summer back to 115 US to the Euro or 90/100 in favor of the Dollar. The average European has been hit with infalation of nearly 20% since January with the currency change over (I know I'm American living over here). Gold is always the hedge bet and those who have hedged have their best arguement in years except for one thing - there is a glut of gold out there with World production way up, same with silver. The fear of a terrorist attack on the US is somehow overblown, not that it may/may not happen, but rather that Europe is just as easily attacked - so their currency could dive the likes of which no one would ever beleive! Just think if the both areas were attacked, USA and Europe, which currency would hold the most value - the one backed by guns that can defend itself.

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