The fireworks are already going off, and I can assure you it’s not just to celebrate the new year.
Gold is skyrocketing. It’s already up about $20 just in the first two trading days of the new year.
No surprise to me. As I indicated in last Friday’s edition of Money and Markets, gold issued two major BUY signals at the end of 2005. As a result, I expect gold to hit at least $618 this year, and perhaps even as high as $740.
Why is gold exploding higher? What is it telling you?
In my view, it confirms — in no uncertain terms — that this is the year the dollar collapses, shaking the world’s financial markets to the core.
Indeed, years from now we could be looking back at 2006 as a major turning point — when brushfires of world inflation became a forest in flames.
3 Reasons I Believe the U.S. Dollar
Is About to Plunge into an Abyss
Last year I warned you that any rally in the U.S. dollar would be temporary.
While the rally lasted longer than I expected, there’s no question in my mind that the dollar is weak at the knees … its year-long bounce is over … and it’s headed down the tubes this year.
This presents us with several problems — and profit opportunities. I’ll get to the profits in a minute. But first, let me go on record with my big-picture view:
This next phase of the dollar’s decline could demolish its purchasing power and send the U.S. economy into a frightening inflationary cycle that will catch almost everyone off guard.
Anyone who stands back and looks at the chart of the dollar can see that last year’s rally was meager at best: The greenback gained back barely one-third of what it lost between 2001 and the end of 2004.
So you don’t need to be a technical analyst to see that the long-term trend for the dollar is DOWN.
Nor do you have to be an economist to understand the three fundamental forces behind the dollar’s long-term weakness …
Force #1
Record-Smashing Trade Deficit
Couldn’t Come at a Worse Time!
The already-gargantuan U.S. trade deficit jumped 14% to a record $712 billion in 2005. That’s $88 billion more than in 2004, when the previous annual record was set.
This year, don’t be surprised if the trade deficit tops $800 billion, even with some improvement in the U.S. export picture.
My main concern with the trade deficit is not just that we’re buying more goods than we’re selling overseas. It’s that …
We have no control over the U.S. dollars that go overseas for payment of the goods. The recipients of those dollars are free to do whatever they want with them.
They can reinvest them back in the U.S. if their confidence in the U.S. is high. Or, to the degree that they lose confidence in the U.S. and the dollar, they can quickly diversify into other assets and other currencies.
So as long as we can assume that confidence in the U.S. will be strong, no problem. The dollars come back to us.
But that’s a very shaky assumption — especially when you’re talking about the fate of hundreds of millions of Americans in the balance.
If the assumption is wrong, the dollars get sold off, and the U.S. economy is drained of the money it needs to keep going.
What happens? Initially, to replace that missing money, our government prints more, regardless of the inflationary consequences.
That couldn’t come at a worse time. Because when overseas investors look at the U.S. today, they see the biggest deficits in the history of industrialized society.
In addition to the trade deficit, they see our huge budget deficit. They see another $40 TRILLION in unfunded liabilities in Social Security, Medicare, and government pensions.
And they don’t like what they see. So more are starting to turn away from the U.S., take their U.S. dollars, and go elsewhere.
The latest data: Official net purchases of U.S. Treasury bonds and notes equaled only $79.9 billion in the 12 months ended October 2005, less than half the $200.7 billion in the previous 12-month period.
Force #2
Central Banks Already
Dumping U.S. Dollars!
Don’t let anyone kid you. Foreign central banks aren’t under any obligation to continue holding a particular percentage of their reserves in dollars.
In fact, two major players are already starting to diversify out of dollars: Russia and China.
Guess what they’re buying: GOLD!
Russia’s using some of its petrodollars to buy gold as a hedge against a decline in the greenback. And China has already announced it will boost its gold reserves by putting 2.5% of its trade surplus in gold — every year.
A 2.5% allocation may not sound like much. But based on China’s trade surplus last year, you’re talking an estimated $2.5 billion going into gold this year alone. Since the physical gold market is tiny, $2.5 billion is more than enough to keep gold moving higher.
We also have evidence other central banks are — or will soon be — turning away from the US dollar and buying more gold. Thailand, Vietnam, Indonesia and India are all said to be on the move in the gold market.
And this year, I wouldn’t be surprised if we see more central banks do the same, especially in South America, including Venezuela and Bolivia.
Venezuela’s president Chavez is avowedly anti-American.
Ditto for Bolivia’s president-elect, whose first foreign visit after his election victory this month was to Cuba’s Fidel Castro.
Both Venezuela and Bolivia have political motives for rebuffing Uncle Sam. And both are rich in petrodollar receipts. Although they are relatively small players in the world’s financial markets, you’ve seen how small amounts of buying in the gold market can help send prices shooting higher.
Moreover, there are also plenty of non-political reasons for central banks to reduce dollar holdings and buy gold.
First, because too many eggs in one basket — in this case, the dollar — is never a good idea.
Second, because the only way the U.S. can keep on chugging and handle its huge debt problems, is for the Federal Reserve to create more inflation. That means a weaker U.S. dollar.
Other central bankers know this. So they’re turning away from dollars and buying gold.
If these central banks start pulling out of the dollar en masse in 2006 — as I expect they will — it will spell disaster for the greenback, setting off a financial crisis in the U.S. the likes of which has not been seen in decades.
Gold should easily soar to my next two targets of $618 and $740 an ounce.
Force #3
Foreign Stock Markets Leaving
Most U.S. Indexes in the Dust
Hardly anyone is talking about this today, but let me assure you — in the months ahead, this is exactly what you’re going to hear: “The overvalued U.S. stock market is another reason overseas investors started to flee U.S. shores.â€
Consider the following …
— The Dow dividend yield is currently a measly 2.31%, a level more associated with a market top than with a market bottom.
— The market cap for all U.S. stock exchanges trades is equal to about 130% of GDP, near levels seen at the excessive top of the market in 2000.
And that’s just from a U.S. investor’s perspective. From an Asian and European perspective, those valuations are even higher when you add in the potential that the dollar could fall as well.
Why should a foreign investor buy into U.S. stocks when they see far greater potential for capital appreciation abroad?
Bottom line: Expect Asian and European markets to outperform the U.S. stock markets again in 2006 — either rising more, or falling much less.
Major Consequences of
A 2006 Dollar Collapse
With 2006 set to be a disaster for the U.S. dollar, it’s absolutely essential that you know how it’s going to impact you.
The very first consequence: Inflation is going to SOAR.
I see no way you can have the dollar plunge again and not set off another round of inflation.
But this year’s inflation surge will take on a new form, reaching deeper and wider than last year’s …
- A far more diverse range of natural resources will move to all-time highs. Not just copper (one of the first to reach a record high in 2005) but also gas, aluminum, tin, zinc and other base metals.
You will also see huge upside moves in agricultural commodities that lagged in 2005 — soybeans, wheat, corn, sugar, coffee, cocoa.
- Inflation will spread out and begin to affect wages. Up until now, we have not seen much wage inflation. Chief reasons: Increasing productivity and surplus labor stemming from layoffs in the wake of the tech wreck of 2000 and 2001.
But now, labor is tighter. And with inflation in raw materials, especially oil and gas, now impacting household budgets, the demand for higher wages is going to burst back onto the scene. More and more employees will demand increases in pay.
The second consequence of a 2006 bear market in the U.S. dollar: A disaster in the bond markets and soaring long-term interest rates!
For the past several months, pundits on Wall Street — and even Mr. Greenspan himself — have been wondering why long-term interest rates have failed to climb higher.
Plus they’ve been claiming that because long-term rates have not gone up, deflation is back on the table as a real possibility. The flat yield curve, they say, is proof.
My view:
They’re dead wrong. The Fed had no choice but to raise the short-term federal funds rate 13 times since June 2004.
Meanwhile, despite all the rate hikes, the Fed has done nothing to stop world commodity prices from surging … nothing to prevent a plunge in the dollar … and nothing to stop U.S. inflation from spreading.
That’s why foreign central banks will be pulling out of dollars, while plowing into other currencies and gold. That’s also why I think bond prices are going to fall and long-term rates are going to surge.
Seven Steps to Take NOW
To Prepare for the Coming
Inflation Stampede
We are now on the doorstep of one of the most exciting — but also most dangerous — years in decades. It’s essential that you take the appropriate steps now, early in the year, to prepare.
Step 1. If you have gains in U.S. stocks that are vulnerable to rising inflation and interest rates, recognize that there is not much upside potential … and the downside risk is increasing. So grab those gains now.
The major exception: Gold, oil and other natural resource based positions such as those found in my Real Wealth Report.
Step 2. Make sure to keep a solid allocation in money markets. They’re safe. You can sleep at night. And your funds automatically get the benefit of rising rates.
Step 3. If you’re not already out, get out of long-term government and corporate bonds immediately. A disaster in the bond market could begin at any time.
Step 4. Make sure you have your core gold and mining stock holdings in order. I cannot overemphasize this.
I recommend 5% in gold bullion, with up to another 25% in the very best mining shares and funds …
* Newmont Mining Corp (NEM). It’s still my favorite blue-chip gold miner. If not already on board, buy at the market.
* Ditto for my two favorite gold mutual funds: Scudder Gold & Precious Metals Fund (SGLDX) and Tocqueville Gold Fund (TGLDX).
Step 5. Stay invested in key natural resources, such as the oil and energy positions in the “Natural Resources Riches†and “Real Income†sections of my Real Wealth Report.
Step 6. To hedge against the coming decline in the dollar (besides gold), consider the Falling U.S. Dollar Profunds (FDPIX) — one of the few currency-based mutual funds that benefits when the dollar is sinking.
Step 7. For more aggressive investing and speculation, consider my Gold Trader Hotline. On my latest gold recommendations, subscribers in that service should have just bagged gains of up to 121% and 126% — in less than a month!
Best wishes,
Larry Edelson, Editor
Real Wealth Report
Gold Trader Hotline
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Beth Cain, Christine Johnston, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
© 2006 by Weiss Research, Inc. All rights reserved.
15430 Endeavour Drive, Jupiter, FL 33478
