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Hedge
fund managers and
newsletter writer Mike
Swanson sees a big
decline in the dollar
and a return of the gold
bull market just ahead.
"I just took some
short positions in the
dollar today and am
going to start to build
a long position in gold
and silver over the next
few weeks. Gold and
Silver tends to trade
opposite to the dollar
and the dollar is about
to resume its long-term
decline," he said.
Most
investors may be totally
asleep when it comes to
the dangers of a falling
dollar, but there
appears to be a buzz of
activity inside the
Federal Reserve and the
Treasury Department.
Three weeks ago the
Treasury Secretary Henry
Paulson and Fed Chairman
Ben Bernanke traveled to
China to discuss the US
trade deficit with China
and probably tried to
talk the Chinese
government into lowering
the value of the Yuan.
The
Treasury Secretary is
taking steps to prepare
for a dollar crisis.
According to the Wall
Street Journal, Paulson
"has reinvigorated
the President's Working
Group on Financial
Markets, which had
languished. Mr. Paulson
is chairman of the
Working Group, which
coordinates government
policy on financial
markets and includes the
heads of the Federal
Reserve, Securities and
Exchange Commission, and
Commodity Futures
Trading Commission. Mr.
Paulson has insisted
that they meet about
every six weeks. Before
his arrival, the group
met every few months and
sometimes as
infrequently as once a
quarter."
The
Wall Street Journal went
on to say, "Mr.
Paulson is having the
Working Group look at
the systemic risk posed
by hedge funds and
derivatives, and the
government's ability to
respond to a financial
crisis, officials said.
He has ordered his chief
of staff, Jim Wilkinson,
to oversee the creation
of a Treasury command
center to track markets
world-wide and serve as
an operations base in a
crisis. The center would
revive a
market-monitoring room
closed in a 2003 budget
cut."
As
you probably know the
Working Group on
Financial Markets is the
official title of what
some people call the
"plunge-protection
team."
After
the Wall Street Journal
article came out, Fred
Barnes, of the
neo-conservative Weekly
Standard magazine, wrote
this:
"Paulson believes a
financial crisis is an
overdue serious crisis
that would be a body
blow to the economy.
This fear is shared to
some extent by Bush and
Bolten, who wanted a
major Wall Street player
at Treasury in case an
economic emergency
occurs."
According
to Mike Swanson,
"the accumulation
of debt in the
United States
cannot continue much
longer. In the last
century the ratio of
debt to GDP hovered
between 120% and 160%.
In 1929 the debt rose to
260%. Now the ratio of
debt to GDP is at a mad
300% and has been
growing over the past
year. Something has to
give."
Economist
Mark Thornton, author of
Tariffs, Blockades, and
Inflation, agrees. He
thinks investors need to
pay attention to gold
and silver. "There
is always a bull market
somewhere in the
economy. It could be
junk bonds, real estate,
a particular currency,
tech stocks, foreign
markets, land, blue
chips, or small caps,
" he says,
"Today we are in a
bull market in gold,
silver and commodities.
Oil and gas are at
all-time highs while
metals such as silver
are up more than 25% in
2004."
The
dollar has taken a
plunge during the past
five weeks. The US
dollar index broke below
its 85 support level and
has been falling ever
since. Its next support
area is 80, which has
been support for the
dollar index for thirty
years. "It seems
very likely that this
level will be tested
within the next few
months. And if the
dollar index stays below
80 for more than a few
weeks a full blown
dollar rout will be very
likely.
The
thing about currencies
is when they get in a
trend they tend to stay
in that trend. The
fundamentals behind
currencies include
economic growth rates,
interest rates, and debt
levels. The dollar
topped out in 2000 and
2001 as the bubble in
the NASDAQ burst and the
US
economy entered into a
recession. It then fell
until the Fed began to
raise interest rates in
2005.
That
cycle of interest rate
hikes helped to put a
bid underneath the
dollar. That cycle came
to an end this summer
and it now appears that
the Fed will actually
start to lower interest
rates next year. Fed
funds futures contracts
are now predicting a 60%
chance of a rate cut in
March as recent economic
data points to signs of
a slowing economy. A
slowing economy and
falling interest rates
will bring with them a
resumption of the dollar
bear market.
"I
would expect an orderly
drop in the dollar index
down to the 80 level to
occur in the first
quarter of 2007. After
that though, if the
dollar stays below 80
for several weeks, a
full blown dollar crisis
will likely begin. Gold,
Silver of course, will
move up ahead of that. I
expect gold to go
through the 700 level as
the US dollar index
tests 80. A move below
80 in the dollar index
however, will bring the
price of gold above
$1,000 an ounce,"
says Swanson.
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