April 21, 2006

The Coming Dollar Devaluation
by Michael J. Kosares (4/21/06; 10:01MT - usagold.com msg#: 140640)
Centennial Precious Metals, Denver

Volatility in the gold market is greater than anything we've seen since the 1970s bull run. There is so much analysis out there as to why this is happening that it becomes difficult to pin down the two or three primary drivers to this market. My hope with this post is to pull together some seemingly disparate parts into a functioning whole for the benefit of our readers trying to make some sense out of this.

Overall, despite the volatility, the trend in gold is solidly to the upside. The most important feature of the trend from both a fundamental and technical standpoint is that there are some deep pockets on the bull side of the equation with last night's overseas run-up in the price the latest manifestation of this "presence."

But what is the nature of this presence?

In my view, that "presence" is not so much an individual or group, like the hedge funds, but an idea which has reached full maturity in the collective-global financial consciousness and working across the spectrum of financial interest from the hedge funds, to the big banks and trading houses, to large capital investors, and smaller investors alike. That consciousness has to do with the U.S. government/Federal Reserve's move to devalue the dollar.

Thursday's Financial Times featured a front page headline -- "IMF eyes dollar depreciation to resolve global imbalances."

"The dollar will have to depreciate 'significantly' over the medium term if global imbalances are to be resolved in an orderly fashion, the International Monetary Fund said yesterday as it stepped up pressure for far-reaching shifts in exchange rates."

Please note the use of the cage rattlers "significantly," "far-reaching," and "orderly fashion." In other words dollar volatility, destabilizing as it might seem, is preferable to the alternative -- an international economic collapse.

In my view, Bernanke has been positioned at the Fed to engineer this dollar depreciation and the IMF statement both falls into line with this policy and serves as a warning to the financial establishment that devaluation is clearly the policy of the U.S. government/central bank. I would not be surprised to learn that the report was leaked before the latest leg in the gold run-up. The financial establishment may have been enlisted to play a role in the policy. Overarching all is that the policy, as of the IMF statement, has become common knowledge.

This is the "presence" driving not only gold but all the commodities. When you add the "rolling bubble" phenomena to this analysis, the volatility is more easily understood. Anyone who believes that these markets are driven by anything other than pure monetary inflation is by-passing an important aspect of the current financial markets, and the liquidity is going to gold for good reason.

In the end, a devaluation cannot occur without the blessing of the other major players -- the yen, the euro and the yuan. In today's world of currencies without a de jure attachment to gold -- that devaluation is as much a "political" consideration as it is "economic." The IMF, we now know, will play a key role in bringing the devaluation to fruition, and should be equated by current and potential gold owners as a call to arms -- a flex point the equivalent of Nixon's 1971 closing of the gold window. Those of us old enough to remember can pass along what "devaluation" meant to the American economy in the 1970s. Further, when you take the 1970s timeline as a template, it begins to look like everything that has happened so far has been merely the prelude.

For the small investor (you and me), coming to some understanding of the political culture driving these markets remains key to our personal psychological well being. The most successful investors come to an understanding -- a philosophy, if you will -- and then carry that philosophy around with them applying it to everything they do financially. Understanding that devaluation is a policy and not something that comes out of the clear blue without warning has become requisite. Holding physical gold in the form of coin and bullion is the best alternative when faced with this volatility and the clear conception that the U.S. is likely to prevail with this policy. (If it doesn't, my advice to the world's citizens no matter where they live is to prepare for the worst. Either way gold becomes the most important holding for the individual.)

Some of you will recall that I predicted a $525 gold price by the end of 2005. When the prediction was made, some thought it to be out of line with reality. Also, remember that I predicted a spiking gold price in 2006 and a $760 interim top based on a "devaluation of the dollar." Whereas the 2005 uptrend occurred without a coincident dollar drop, the $760 prediction was based upon a dollar devaluation becoming part of the market mix.

The pieces are beginning to fall into place. The volatility will now be ever-present, but the dips are likely to be met with buying by those who understand the culture now at play. Marc Faber recently noted that the Kondratieff Wave is really an analysis of the commodities' cycle. He said that we just finished the 15 year bear market in commodities and are now in the first years of a 15 to 20 year bull market in commodities (gold being the king of commodities). The devaluation of the dollar falls into that analysis.

My best,
MK