PART 33 Ceteris
Paribus & U.S. Dollar by
Ned W. Schmidt, CFA, CEBS Schmidt
November 29, 2006
The global financial phenomenon of individuals and businesses
moving their funds to monies in which they have the highest
confidence, or money which has a higher store of faith.
when preparing an often done dish for a meal the chef will change
one ingredient. That alteration in the recipe is an attempt to
determine if that modification enhances the flavor experience. In
this act the chef is leaving all else unchanged. Economists might
describe the result as a �ceteris paribus recipe,� all the
other ingredients held unchanged with the exception of one.
like to use this term when discussing a new concept being
introduced into the analysis. Ceteris paribus essentially means
�all other things the same or unchanged.� In analyzing the
impact of a force on an economic system, we first try to isolate
only the impact of that force. Everything else is held constant,
or assumed to be unchanged. That way we can determine the
influence of that single force on the economic system. The
Thanksgiving week provided a rare glimpse of the world�s view of
the U.S. dollar without the influence of New York�s group think
the Thanksgiving week in the U.S., business activity experiences a
serious slowdown. Much of the financial world winds down on
Wednesday afternoon before the Thursday holiday and does not
return to an active level till Monday. The influence of U.S.
investors was essentially held �unchanged,� allowing us to
analyze the influence of foreign investors. The
markets, without the strong influence of New York paper asset
groupies, gave us a rare glimpse of the attitude of foreign
investors. The rest of the world was able to vote on the U.S.
dollar without the influence of U.S. traders. That vote was a
resounding �no.� The U.S. dollar was sold with a
vengeance, and reentered its long-term bear market.
following chart is of the value of the U.S. dollar based on the
median change of the dollar relative to a basket of national
monies. As this measure uses the median change in foreign exchange
values, it is superior to the dollar index popularly used. The
widely used dollar index is a trade weighted calculation which
introduces serious biases into the index. This index uses the
median change in the dollar�s value which removes some of these
biases. The dollar index uses inverted triangles plotted on the
left axis. Monthly average $Gold is plotted with circles and the
is readily apparent in the graph, the dollar has broken to a new
low. This development was foreseen in a previous Moneyization article.
That breakdown in the global value of the dollar to a new low
means that the path of least resistance for the U.S. dollar is
down. In that same chart we can see what happens to the value of
$Gold when this index breaks down. The
last time such a development occurred was the in the first half of
2006, and $Gold spiked to a new cycle high. A similar move
lower for the U.S. dollar and a move higher for $Gold seems to be
way of viewing this ongoing move out of U.S. dollars into monies
in which investors have a higher faith, the moneyization process,
can be observed in the second graph. These shifts occur in waves
of positive and negative psychology on the dollar, or any other
national money. The oscillator in the second graph, solid line and
right axis, is an attempt to measure that psychology. To make the
oscillator more easy to use it is flipped upside down, a reading
of -100% is maximum bullish optimism on the U.S. dollar. That
level was achieved during October while Street was on a bullish
dollar rampage. During such periods of dollar optimism $Gold is
weak. The dollar price of Gold moves down.
that bout of excessive optimism, the psychology has shifted to a
more realistic bearish view on the U.S. dollar. One consequence of
that shift has been the sell off of the dollar during the
Thanksgiving week when the world was free to vote on the dollar
without the interference of the New York group think. Another
consequence is that $Gold has moved higher and is like to move
higher in the future. A
strong possibility exists that the U.S. dollar may enter a period
marked by a violent depreciation on foreign exchange markets. Gold
is important wealth protection during such periods.
voting in the foreign exchange markets by foreign investors was
rather clear. Path of least resistance for the U.S. dollar is
down. Path of least resistance for $Gold is up. Investors are
moving to Gold and Euro as they have higher faith in the value of
those monies. Those individuals able to invest in the Chinese Yuan
are doings so as the long term value of that money is likely to be
superior to that of the U.S. dollar. The
dollar is no longer the money of choice for global investors.
major reason that the U.S. dollar�s bear market is likely to
enter an acceleration phase is the rapidly deteriorating prospects
for the U.S. economy. Rarely do investors want to own the national
money of a nation entering a recession. The U.S. economy is
rapidly heading toward a hard economic landing. That the U.S. is
entering into a recession should be readily apparent in the first
part of 2007. Deteriorating economic trends are clearly appearing.
For example, Wal-Mart which represents 8% of U.S. retail sales
reported that sales were down in November.
The heart of the U.S. economic expansion has been the housing bubble,
and it has burst. Much hot air has been created in the fervent
hope of finding a bottom in the collapsing U.S. housing sector.
Despite the headline number on October sales of existing home, the
underlying data produced little that suggested a bottom is near.
Sales of single family homes, like the one you live in, did
improve in October to the second lowest level in a year. These
sales are off 11% from a year ago. Condo sales are now down 15%
from a year ago. Identifiable condo inventory for sale is nine
months of supply. Prices of single family homes are down 3% from a
year ago after rising $200 in October. Condo prices are off 5% from a year ago, and are at
the lowest level in a year. In some communities, home sales are
off 50% from a year ago. The economic repercussions of this real
slide have yet to show in the numbers, but with foreclosures in
the U.S. in a decidedly rising trend that will happen.
As the dollar loses value on foreign exchange markets, the real value
of a dollar denominated investments goes down. A foreign
investor�s dollar denominated wealth falls in value each time
the dollar trades down on foreign exchange markets. These
investors have already reduced their rate of buying of U.S. dollar
debt. When they realize that their losses on dollar debt are
mounting, their desire to buy more will weaken further. Their
lack of buying and then selling will send interest rates in the
U.S. much higher.
Contrary to what the Street believes, the global markets are more powerful
than the Federal Reserve. The
financial markets have continued to act as if the U.S. can set
domestic interest rates in isolation. That belief is in error in
today�s world. Rising interest rates will send U.S. housing into
further decline. U.S. economic activity will follow that collapse
in the housing market. A bottom for coming U.S. economic recession
will be well into 2008. As a consequence, the value of the U.S.
dollar is far from its ultimate bottom. Gold has strong
fundamentals that will propel it to the current target price of
Gold chart on the right shows that the metal bears have been wrong.
Gold�s unwillingness to satisfy the bears is due to the
fundamental demand for the metal around the world as protection
against a collapsing U.S. dollar. As we witnessed during the
Thanksgiving week, the only real bears on Gold are on Wall Street.
This is same group that thought the NASDAQ was worth 5000, and now
are running rampant with private equity takeovers. The game in
paper asset will again have the inevitable crash, and Gold is a
way of protecting your wealth. Gold is currently trying to correct
and an over bought condition, and may go through a rolling
correction. Periods of price weakness will always develop. Use all
such price opportunities to add to holdings of Gold. $Gold at
$675-700 is likely by Christmas. New cycle high is expected in
One source contributing to continued optimism on Gold has been the
resilient Silver market, shown in the above graph. Silver
has refused to accommodate the bears. Silver�s action is a
leading indicator of what we can expect in Gold. Rather than
accommodate the bears, Silver continues to show the benefit of the
fundamentals, more demand than supply. Having recently taken out
the last short-term high, Silver is likely to produce a new cycle
in the coming months. However, an overbought condition at present
may cause a slowing in the rate of price appreciation in the
short-term. Investors should prepare themselves to use all
weakness in price to add to holdings. When Silver is more than $15
a lot of people are going to suddenly discover it.
W. Schmidt,CFA,CEBS is publisher of THE VALUE VIEW GOLD
REPORT. That report now includes a weekly message, TRADING
THOUGHTS, to help investors identify timely points for
buying Gold and Silver. His monumental report, "$1,265
GOLD", with 255 pages and 98 graphs, is now widely known,
and is available at www.amazon.com
or from the author by clicking HEREThis work has now been read by investors in over twelve countries
around the world. Ned welcomes your comments and questions. His
mission in life is to rescue investors from the abyss of financial assets
and the coming collapse of the U.S. dollar. He
can be contacted by Email.
Please remember that no method is perfect nor is the one
running the model. All estimated returns are for the model portfolio and
do not reflect those earned on actual portfolios.