GoldMoney Alert - 1 April 2007

More Trouble for the Dollar

The US government this past week took another step toward protectionism. It previously prevented China from buying Unocal and Dubai from buying the company that managed several US ports. This time the protection card could not be more blunt. The US government imposed tariffs on the importation from China of certain types of paper.

As noted by savvy and wise Alan Abelson in the current issue of Barron's: "the first casualty was not goods made in China but the dollar", which swooned after the announcement. Abelson goes on to say:

"Weakness in the dollar, if it continues, would pose a dicey dilemma for the Fed and a fresh source of unease for the consumer, the economy and stocks. If Mr. Bernanke does decide that the troubles besetting the subprime outfits are spreading, as they assuredly are, and is tempted, by way of remedy, to cut interest rates, that could truly wreak havoc on the buck.

A fresh descent in the dollar would fan inflation further and, at the same time, cause grave disquiet among the foreign holders of a trillion or so of our IOUs, of which something like $350 billion worth rests in Chinese hands. No lender, no matter what language he speaks, can feel anything but acute discomfort as he watches the value of his assets steadily depreciate."

I am in complete agreement with Abelson's conclusions, and so apparently is the market. Take a look at the following chart of the US Dollar Index.

The Dollar Index ended March at 82.93. A close below 82.45 would be a new 2-year low. If that happens - and I think we will see a new 2-year low in a matter of weeks - then a record low for the dollar cannot be far behind.

Protectionism is just another nail in the dollar's coffin. Some of the other nails that we already know about are:

• inflation pretty much across the board, but particularly in commodity prices,
• unrestrained dollar creation by the Federal Reserve,
• central banks diversifying out of the dollar,
• Iran accepting euros in payment for crude oil, and
• unwillingness of the Federal Reserve to raise dollar interest rates to fight inflation.

Bad news for the dollar is good news for both gold and silver, which will continue to grow in popularity as the safe-haven moneys of choice.

The above charts of month-end prices make clear that both gold and silver remain in bull markets, but the gold chart is also conveying another important message. The all-time month-end high price for gold is $681.50. The above chart indicates that a break above that level on a month-end closing basis is imminent.

That event will be another global wake-up call, just like clearing $500 in December 2005 was a wake-up call with worldwide impact. Bull markets build over time as they gain attention and attract new investors. Gold and silver bull markets are no different. Each hurdle they climb attracts more buyers, but keep in mind too that each floor the dollar breaks through will cause more money to move into the precious metals. In summary, the prospects for a new record high in gold above $850 remain excellent.

Published by GoldMoney
Copyright © 2007. All rights reserved.
Edited by James Turk

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