Discussion in 'Economics' started by doug456, Nov 26, 2003.

  1. m22au


    That makes sense, however

    (1) It is highly unlikely that one person would control all (or even a majority) of the world's gold

    (2) That gold has not been as well recognised as a store of value over the past 23 years does not mean that it won't be recognised as such in the next 23 years, especially given it has been a store of value for thousands of years

    #31     Dec 2, 2003
  2. vak


    "Theoretically, if you controlled all the gold in the world what would it be worth? Nothing, no one really needs gold for any widespread commercial purpose."

    you forgot to mention that demand is higher than supply for most precious metal while it's not the case for oil where there are many market buffer (russia, saudia arabia and other depanding on price)
    #32     Dec 2, 2003
  3. Cutten


    Currency rates reflect the international capital markets vote of confidence in any given country - countries which are attractive for global capital will enjoy stronger currencies relative to those which are less attractive. Relative interest rates & monetary policy are one component, but so are other factors such as portfolio investment flows, direct investment, trade flows, political stability, central bank intervention, government treatment of domestic & foreign capital etc. Generally it is *not* beneficial to have a weak currency - the only real beneficiary is the export sector.

    Looking at currencies this way gives a better explanation than simplistic theories such as the idea that countries with twin deficits will always see currency weakness. Two of the biggest bull markets were the dollar in the early 80s and the Deutschmark in the early 90s - both were accompanied by large and rapidly expanding deficits. If a country is sufficiently good at attracting capital flows, then it can sustain large deficits virtually indefinitely (this is why Jim Rogers' perma-bearishness on the dollar has been wrong for so many years). However, a large deficit exarcerbates currency weakness if and when capital flows into a country diminish, such as is happening now with the dollar.

    Also, remember that currencies act like any other markets - price is set by expectations & discounting of future developments, and government intervention against powerful long-term trends usually fails.

    The dollar occupies a special place in the currency market because it is used as the world's reserve currency i.e. global transactions are generally priced in dollars, and foreign central banks hold way more of their currency reserves in dollars than any other currency. This gives a large advantage to the US - the banking system creates pieces of paper and receives valuable foreign assets in return. However it also creates a risk - if US policy actions create the impression that the dollar is less attractive as a reserve currency, then there is a potentially huge amount of foreign capital held as dollar reserves that could be shifted into other currencies. The Euro would be a prime beneficiary because it is the only credible alternative as a reserve currency. Gold is also a beneficiary because it is the classic liquidity hedge in currency crises.

    The recent dollar weakness is due mainly to the Federal Reserve's incredibly loose monetary policy, along with the Bush administration's willingness to let the currency slide. There is also a view that the US is now more hostile to foreign capital than before - post 9/11 there is political hostility to Arab capital, and now there are mooted trade barriers to Asian and even European countries. So long as Greenspan thinks ultra-low rates are necessary, and politicians think the US export sector needs a weak currency and industry needs protection from foreign competition, the dollar is likely to continue falling. Like most long-term trends, currency moves tend to overshoot in each direction. So be careful of buying the dollar just because it becomes "cheap" - it will likely become even cheaper before it eventually recovers.
    #33     Dec 2, 2003
  4. vak


    "You probably a stock trader, not FX trader.
    If you take a look at recent USD fall, the fall has been broad-based. With USD index fell below 90.00. This, in turn, resulted in rallies in EUR/USD, GBP/USD, AUD/USD, and a dip in USD/CHF with the exception in USD/JPY where the fall, somehow failed to materialize due to JPY weakness – also broad-based, against other currencies."

    if that was true crosses would almost allways trade in small ranges -or not trade at all-
    in fact some of the best moves this last 3 year where on crosses (and not onlycrosses involving jpy on one side of the trade)
    #34     Dec 2, 2003
  5. josbarr


    From Richard Russell's 12/01/2003 letter.

    So far, the stock market has paid almost no attention to the sliding dollar, and I take this to mean that the stock market sees no problem with a SLOWLY declining dollar. A "lightly and politely" declining dollar makes US exports more competitive, and hopefully (and I emphasize the word "hopefully") a slowly declining dollar will not frighten our foreign holders of over $1 trillion in Treasury and agency bonds.

    If our foreign creditors become "tired" of seeing their US holdings slowly sinking, sinking, sinking, they're going to do just what you or I would do. They're going to either slow their buying of US Treasury securities -- or God forbid, they're going to actually start selling our US Treasury debt. If that happens interest rates will rise and the wheels of the US economy will start feeling the brakes tighten.

    And the wise-guy snaps, "So what, so the US economy slows down, big deal." And yes, a slow-down would be OK in "normal times," but these aren't normal times. This is a US that is up to its eye-balls in DEBT. If the US economy slows down during the period ahead, we're going to have a recession that you won't believe, and if that happens the housing boom will top-out, and people will start walking away from their overpriced homes. As for car sales, forget it, the dealers will be giving cars away.

    I've been saying for months that the Achilles Heel of the US economy and the stock market is the dollar. So let's take a look at the dollar. A kind subscriber sent me the very pretty chart below, showing the Dollar Index from 1970 to the present.

    The Dollar Index hit a high of 165 in 1985, the year of the Plaza Accord (an agreement to allow the dollar to weaken). From its 1985 high the Dollar Index headed down by 1982 the Dollar Index broke below 80, having lost better than half its international value.

    From there the Dollar Index rose to 120.80 in January, 2002. But conditions are worse now than they were at the 1985 highs. I say that because today we have twin deficits equal to ten percent of our Gross Domestic Product. Furthermore, short rates are a lot lower. And the Dollar Index is a lot lower now than it was in 1984. For these reasons, it would not shock me to see the dollar do a "repeat" of its 1985 to 1992 performance. If, for the sake of argument that does occur, then we could see the Dollar Index cut in half again, sinking to 60 or even below. Remember, these primary moves tend to go further than anyone thinks possible and last longer than anyone thinks possible.

    The big question then becomes -- does the dollar decline slowly or does the dollar start to fall apart? I don't have the answer to that one, and neither does anyone else. But if the dollar does drop precipitously, that will stir up fears on the part of our foreign creditors, and if they cut back on their purchases of US securities, that's when the trouble hits -- big time.
    #35     Dec 2, 2003
  6. Vak,

    The rise and fall in currencies are not always driven by one currency. True that recent move has been more likely USD-driven.

    However, at times, there are more than one market driver. Perhaps USD and GBP, perhaps USD and EUR, perhaps EUR and JPY. It's really complicated to hold the assumption that when USD up all else fall. Or when EUR is up, other currencies should follow suit, battering USD. That's why I tend to ignore the crosses. Which means, if I trade EUR/USD, I pay no attention to other pairs. I just glue my eyes on this pair.

    At times, I hear my colleagues saying "What happened? Why EUR/USD is up but USD/JPY is up? and why the hell is GBP sink?"

    Given that question, I could simply say: "Why not? If EUR is stronger than GBP and JPY and USD, that is very likely. (EURGBP up, EUR/JPY up, and EUR/USD also up).

    To Future Shark,

    There have been talks about shifting the valuation of oil trade from USD to EUR. There have been some shifting of currency reserves allocation among some countries from USD to EUR, too.

    While it's true that Americans are big spenders on foreign goods, this, in turn undermine the domestic US firms which aim for domestic market. While they can export the goods overseas, they still losing their domestic markets to foreign goods.

    Also, I would not be surprised too if the Americans later should pay the imports from Europeans in European currencies than in USD terms, and Asian currencies for Asian goods.

    That, is not impossible. Given recent trade rows against China and EU, retaliation would be likely if US Administration could not fix the situation. Instead if they keep messing around the global trade terms, more countries will support such retaliations, sparking global trade war. First it may seem to put disadvantages to the parties involved, but next the rest of the world will feel the echoes.

    As for gold, after sneaking past $400/oz, it is bound northwards. Gold is conceived as a more reliable means of investment. It doesn't matter what an individual thinks. If you think it's just the majority perception, well, majority rules.

    For commercial purposes, gold is indeed needed. Especially for electronic industries.

    One last thing, I could not imagine how anyone capable of controlling the whole supply of oil and/or gold. If you think US will attempt to do that (which I think they already did), you should know that other rich-oil and gold-plated countries will not just give up their valuable resources. At least not without a fight.

    #36     Dec 2, 2003