In June 2002 I
published an article entitled "The Coming US Dollar Implosion". At
that time the Euro was US$ 0.96 and the US Dollar Index 108. The figures
today (3rd Dec 2003) are Euro = US$1.20 and a US Dollar index of just under
90. The Euro has gained 25%. The US Dollar index has declined 17%.
Churchill might have put it, in regard to the US Dollar :
"We have reached the End of the Beginning
and are about to enter the Beginning of the End".
What has taken place during the past 17 months has been no more than Part I
of the US$
implosion. We are set to start Part II.
During the past
17 months the US Dollar has declined moderately against most European
currencies, and by even more against the currencies of commodity producers
such as South Africa, Australia, Canada,
and New Zealand.
Elementary economics teaches that when a country's currency depreciates, that
country's trade deficit will gradually diminish. Yet, despite a two year
slide in the Dollar, there has so far been no decline in the US trade
deficit. Why the exception?
The answer lies
in the countervailing actions adopted by some of America's Asian trading partners.
Those with the largest surpluses, mainly Japan
have been intervening in the markets to slow the appreciation of their
currencies against the Dollar in an effort to protect their export
industries. China, which
today enjoys the largest surplus of all America's trading partners,
linked its currency directly to the US Dollar. Despite rising opposition from
the US Government, China's
currency strategy continues unabated.
condemning the Chinese, it is important to understand what is happening in
their country. The Industrial Revolution in the UK
and Europe in the 18th and 19th centuries
totally transformed their economies from agricultural dependency to economies
reliant on industry and commerce. People moved off the land into the towns.
Jobs in the new industries were poorly paid, but they at least provided a
China appears to be
going through a similar experience. They are enjoying their own Industrial
Revolution that is rapidly transforming what was previously an agrarian
economy into one witnessing a massive build up in its industrial and commercial
currently has the lowest cost labour force in the world. They are therefore
being inundated with an influx of US manufacturers. Some transfer existing
operations, lock, stock and barrel. Others have closed down out-of-date facilities
back home only to establish brand new plants in China. To this growing pool may
be added factories controlled by indigenous Chinese entrepreneurs.
With wages in
Asia being a tiny fraction of those paid to workers in western countries, the
trend of moving manufacturing and services to Asia - especially to China and India - is bound to accelerate. Adding
nightmare is a Chinese cultural and business strategy that places great
emphasis on the distant future. This persuades the nation to endure
short-term pain in the interests of achieving long-term goals.
What seems to be
happening is the following. The Chinese view the US as their main export market,
hence the solid link between their own currency and the Dollar. China has been earning massive Dollar
surpluses from its trade with the US. They re-invest those
surpluses back into US Treasury Bonds. By recycling their dollars back into
the system, they play a key role in keeping US interest rates artificially
low. This in turn holds America's
economic recovery on track.
China must know that
it is selling real goods to the USA and being paid in pieces of
paper that will ultimately be worth a lot less.
Chinese understand they will one day have to take a loss on their dollar
reserves, but this is the price that they are willing to pay to maintain the
existing order. The longer they perpetuate the system, the faster their
industrial infrastructure will grow and the greater the number of Chinese
finding jobs. A fall in the value of their accumulated foreign reserves is a
price they are prepared to pay in the interests of laying a foundation for
their country's long-term growth.
China is happy to see
the status quo continue. It will only change if the US takes unilateral action when the US tires of losing jobs and services to Asia. The political pressure is certainly building.
American voters are becoming increasingly aware jobs are disappearing as
factories close. The subcontracting of service work is going to India
where there is a culture of speaking English.
A sign that
groundswell opposition is having an impact was evidenced by President Bush's
recent tour of Asia. He requested Asian
countries to allow their currencies to appreciate against the Dollar. Unsurprisingly
his appeals went unheard. Back in Washington,
the Democrats have been pushing to levy a 27.5% tariff on Chinese goods
imported into the US
"to protect our jobs".
are all signs in the wind that this particular trade arrangement is coming to
an end. Sooner or later the USA
will be forced to take some form of unilateral action to terminate the
relationship. The side effects will be extremely damaging. Their action will
signal that the game is over. It will also confirm the end of the US Dollar
as a reserve currency, triggering Part II of the US Dollar Implosion.
understands that the game is over, the time will have arrived for them to
dispose of their US Treasury Bonds, effectively switching out of Dollars into
something safer like the Euro (the only viable paper reserve asset) - and
into gold, which will soon become the reserve asset of choice. In recent
has steadily been building up the gold component of their country's foreign
reserves. This trend will soon accelerate.
It is possible
may eventually revalue their currency, the Remnimbi.
In the meantime, the result of confrontation will be to tip the US, and
therefore the world economy, into recession. US interest rates will rise rapidly as the Chinese dump their Treasury Bonds,
causing havoc in the US
real estate market. The Chinese economy will not be unaffected and may well
dip into recession simultaneously. Recently constructed factories in China may
fall on hard times. Those that have been financed through debt could go to
the wall. Chinese entrepreneurs will pick up these factories for cents in the
Part II of the
Dollar implosion will differ substantially from Part I. If the US-China
economic relationship changes or ceases, the effect on commodity prices could
be immediate and dramatic. "Commodity" currencies may then no
longer look quite as attractive as they do at present. In the face of
spreading recession, the prices of most commodities would decline, severely
denting the attractiveness of the currencies of commodity producers. This
could cause a severe reaction to events of the past two years in which the
Australian dollar has risen 50%, from 48c to 72c; the South African Rand that
is up almost 100%, from 8c to 15.5c; and the New Zealand dollar that has risen
60%, from 40c to 64c.
The feature of
Part II of the US Dollar Implosion will be a recognition that even presently
popular commodity currencies are mere paper, ultimately no different to the
Dollar itself. There will be an awareness that, unlike the 1930's when
competitive currency devaluations were made "by decree"; we are now in an era of competitive currency creation or
printing. The country with the fastest growth of currency creation
will have a short term trade advantage as their currency depreciates against
competitive nations. As investors withdraw from the erstwhile favoured
currencies, they will have a problem deciding where to invest their funds. This
is when gold will be seen as a viable alternative.
will therefore be a growing awareness and recognition of the vastly more
attractive reserve asset role that gold must and will play in the future. This
recognition is the fuel that will fire a rocket under the price of gold,
driving it to substantial new highs in terms of ALL
In past crises,
the wealthy have protected themselves buy purchasing gold and gold related
assets. Ordinary people, by far the greater number, could rarely afford to
buy gold. Being far cheaper, they have previously had to buy silver. This
metal became the poor man's choice as an asset to protect their savings. Silver
has so far lagged gold in the early stages of this bull market, but that situation
seems about to change.
recorded history the average relationship between silver and gold has been
15oz silver to 1oz gold. The ratio at present is a far higher 75:1
($400/$5.30). This is massively out of line. If gold were to double to $800
per oz, it would not be unreasonable to expect the silver/gold ratio to
decline sharply, possibly as low as 40:1. With gold at $800, this would
position silver at $20.
100% increase in the price of gold could possibly be accompanied by a simultaneous
400% increase (perhaps more) in the price of silver. This offers significant
opportunities both in silver bullion and silver mining shares.
The above graph
of the price of silver has been borrowed from an excellent recent article by
Dan Norcini entitled "A Technical Look at
Silver - Update".
What is quite
clear from the graph is that silver's 22-year bear market down trend has come
to an end. As Dan Norcini says, a new bull market
in silver has been born. It is difficult to argue against this contention and
I have no intention of doing so. A silver price above $6.80 would complete a
fabulous head-and-shoulders base formation. With this as a foundation, it
would be possible to project a very large rise in the price of silver for the
Disclosure and Disclaimer
Statement: The author is not a disinterested party in that he has personal investments
gold and silver bullion, gold and silver mining shares as well as in base
metal and uranium mining companies. The author’s objective in writing
this article is to interest potential investors in this subject to the point
where they are encouraged to conduct their own further diligent research.
Neither the information nor the opinions expressed should be construed as a
solicitation to buy or sell any stock, currency or commodity. Investors are
recommended to obtain the advice of a qualified investment advisor before
entering into any transactions. The author has neither been paid nor received
any other inducement to write this article