Posted on 06/22/2002 12:39:19 PM PDT by Jordi
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 this week in a 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."
New York, June 22 (Bloomberg) -- The dollar is likely to extend its slide against the euro to a record fifth month in June, as the appeal of investing in U.S. financial assets dims compared with Europe.
``The relative speed of growth is going to be better'' in Europe, and that will lure money away from the world's largest economy, said Michael Aguilar, an economist at J. & W. Seligman & Co., with $25 billion in assets.
The U.S. currency dropped 2.7 percent this week against the euro, to 97.12 cents per euro, and reached the weakest level since April 2000. It's lost 3.9 percent versus Europe's common currency so far this month, after dropping every month this year except January.
The dollar may reach $1 per euro, its weakest level since February 2000, in the next several weeks, said Brian Garvey, a currency strategist at State Street Corp. in Boston.
In addition to better potential returns in Europe, the ballooning U.S. current account deficit is also souring prospects for the dollar by funneling money out of the country, Garvey said. The U.S. budget deficit may cause interest rates to rise and make it harder for the Federal Reserve to foster growth, he said.
Traders sold dollars Thursday after the U.S. said its current account deficit grew to a record $112.5 billion in the first quarter, from $95.1 billion in the prior quarter.
Henderson Global Investors Ltd., Julius Baer Investment Management Inc. and Axa Investment Managers all have shrunk the U.S. portion of their global equity funds this year. Henderson has tripled Asia's share, Julius Baer has beefed up European holdings and Axa has done a combination of both.
``The U.S. was overhyped and overbought, and it's being wrung out,'' said Paul McCulley, managing director of Pacific Investment Management Co., which oversees the world's largest bond fund. Europe and Asia ``look cheap relative to a post-bubble America.''
A Merrill Lynch & Co. survey of 282 fund managers at institutions worldwide found they have less money invested in U.S. stocks than at any time since February 2000.
That's partly because U.S. stocks are pricier than those in other countries. Shares of the Standard & Poor's 500 Index trade at an average of 40 times earnings, according to Bloomberg data, almost double those of France's benchmark CAC-40 index, for instance.
Out of U.S.
As a result, asset managers are spreading their investments far and wide.
In Japan, foreign investors bought a net 1.8 trillion yen ($14 billion) worth of stocks and bonds in May, reversing net sales of 1.57 trillion yen the previous three months.
The Nikkei 225 index is the best performing major index in the world this year even after its worst week in 15 months. Before this week's 5 percent decline, the Nikkei was the only major index to have risen this year. It's now down 1.8 percent for the year, compared with a 7.7 percent decline in the Dow Jones Industrial Average.
Buying German
In Europe, too, more funds now flow in than flow out. Net stock, bond and direct investments in the 12-country euro region totaled 2.2 billion euros in the month of March, compared with a net outflow of 26.6 billion euros a year before, according to the European Central Bank.
Bonds are gainers. The yield on the benchmark 10-year German bond this month dropped below 5 percent for the first time since Feb. 28, helped by investors such as Pacific Investment Management Chairman Bill Gross. He told Bloomberg Television last week he is buying five-year German notes because the ``positive outlook'' on the euro contrasts with ``our negative outlook on the dollar.''
``While we can't see strong growth in Europe, we don't see big-time risks either,'' said Chief Investment Officer Gerald Holtham. ``Europe doesn't have imbalances like the U.S.''
``The U.S. recovery will be soggy,'' says Henderson Global's Singapore managing director Alexander Henderson, who describes the U.S. market as ``manic depressive.''
Global investors also are wary of investing in the U.S. after the collapse of Enron Corp., which investigators say used partnerships to hide debt and inflate earnings. A separate inquiry into Tyco International Ltd. has added to the skepticism.
``Post-Enron, investors are searching for simple businesses they can understand, without aggressive accounting policies,'' said Richard Pell, chief investment officer at Julius Baer Investment Management Inc. in New York.
According to Paul Donovan, a global economist at UBS Warburg LLC in London, the U.S. needs about $1.5 billion a day to meet its obligations. With too few funds flowing in to plug the gap, the currency is weakening.
The increasing gap in the current account, the broadest measure of international trade and investment, drains money from the country and weakens the currency if the U.S. fails to attract money back. With the Standard & Poor's 500 Index losing value in 12 of the past 14 weeks, investors have little reason to favor the U.S., analysts said.
The U.S. government had a $147.1 billion budget deficit for the first eight months of this fiscal year, which began in October, compared with a $137.1 billion surplus in the first eight months of fiscal 2001.
Treasury yields may rise as the government steps up debt sales to offset that deficit, working against the Fed's efforts to revive the economy by keeping benchmark rates low, and hurting stocks, Garvey said.
The Fed may keep its 1.75 percent benchmark rate unchanged until next year, according to economists at Credit Suisse First Boston, the Salomon Smith Barney unit of Citigroup Inc., and CIBC World Markets. Fed policy makers announce their next decision on rates Wednesday.
U.S. economic reports next week may spark dollar losses by showing a rebound in the world's biggest economy is fading, say analysts.
"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."
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."
And why was gold taken out of circulation as coinage, or as backing for national currency, some 70 years ago in the US? It was simply not sufficiently liquid, nor was it widely enough distributed. Having a gold-based dollar or even private ownership of gold, also limited the Federal government severely in declarations of interest rates, or in devaluations during periods of austerity. Buying gold bullion shortly before periods of currency devaluation (read: inflation) was one way to preserve wealth, and this conflicted with the social engineering aspect of governmental centralization. Our very economy is predicated upon a steady continuous price inflation, or money devaluation. A dollar in 1950 bought approximately 15 to 20 times as much goods and services as a dollar in 2002. Compare a candy bar, about two ounces, a nickel in 1950, about a dollar in 2002. Or an automobile, which took about six month's wages to purchase both then and now, $1,500 for a new Chevrolet in 1950, or $20,000 for an equivalent model now, in 2002.
What about gasoline? Or computers, TV's, radios? We get a lot more bang for the buck, even after adjusting for inflation. Not arguing, just wodering why "the economy depends on inflation. How does housing compare?
Anything sounding familiar?
When you just print money--inflation happens, and so can prosperity if we all go along with the idea. Problem is, the foreigners are starting to prefer other printed moneys. Maybe the nifty new colors will bring them back. What do think?
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