The Value of a Dollar

My parents always taught me to appreciate the value of a dollar. But if they knew where the dollar was headed, would they have told me the same thing?

Last year, U.S Treasury Secretary Timothy Geithner said:

"Our policy has been and will always be, as long, at least, as I'm in this job, that a strong dollar is in our interest as a country, and we will never embrace a strategy of trying to weaken our currency to gain economic advantage at the expense of our trading partners." - April 26, 2011

Tell that to China. Tell that to Brazil. Tell that to the world. Then tell that to all American citizens.

The dollar fell again last week, while the currency of its biggest competitor, China, made its biggest gains of the year in September.

But it's not what you think. It doesn't mean China is growing or that the United States is losing. It doesn't mean China has a stronger economy and it doesn't mean the United States is worse off. It means that the currency war is in full swing and the United States - believe it or not - is winning (see The Assassination).

Despite the appearance of a rising economy and massive growth in China, sudden collapse is entirely possible and could be caused by inflation, rising unemployment, and a potential real estate bubble.

Maintaining the real value of its reserves is one of China's keys to maintaining internal social control. The Chinese have already warned the United States that they will not tolerate dollar inflation and will take countermeasures to prevent a loss of wealth. But do you think the US cares?

China

September marked the yuan's biggest gain of the year; it's now at the strongest level since 1993.

As I said before, the lower the value of your currency, the more exports you attract. Conversely, the higher the value of your currency, the less exports you attract. That is the basis of a currency war.

Through Quantitative Easing (QE), the United States effectively devalued its own currency by increasing its own money supply, forcing inflation onto China.

China owns the majority of its foreign holdings in US denominated securities. That means as the United States prints, China has to print to keep its yuan from appreciating. It has to print and inflate along with the United States, or suffer an appreciation of their yuan which would lead to lower exports.

For the United States, an economy experiencing deflationary pressures, printing and inflating merely balances out the ramifications of printing in the short term.

For China, an economy with continued growth, printing and inflating is disastrous.

For a more detailed explanation, see America's Gold Wiped Out.

The QE Weapon at Work

The United States' QE is a weapon in this currency war that is clearly working. Its not just destroying our wealth, its killing the economy of China.

The HSBC PMI (purchasing managers' index) shows that China's manufacturing contracted for an 11th straight month. New export orders declined in September at the fastest pace in 42 months and purchasing activity in manufacturing fell for a fifth consecutive month.

China's industrial production rose 8.9 percent in August from a year earlier, the weakest pace since May 2009, compared with a 13.5 percent gain in August 2011.

The QE weapon's effect has also now been confirmed by both the Bank of China and the Bank of Korea.

Here is an excerpt from the WSJ:

Chinese and South Korean central-bank officials criticized the U.S. Federal Reserve's latest easing efforts and advocated reducing Asia's dependence on the U.S. dollar.

The comments Thursday, at a joint seminar in Beijing by the two central banks, are the clearest indication yet of a rising backlash in Asia against U.S. monetary policy, suggesting it could speed up the search for alternatives to the dollar as the main global currency.

"The rise in global liquidity could lead to rapid capital inflows into emerging markets including South Korea and China and push up global raw-material prices," said Bank of Korea Gov. Kim Choong-soo. "Therefore, Korea and China need to make concerted efforts to minimize the negative spillover effect arising from the monetary policies of advanced nations."

The latest round of easing by the U.S. will increase inflationary pressures for emerging-market economies, Mr. Chen said. This contributes to a monetary-policy dilemma for Chinese authorities, he added.

While markets have looked for signs of more forceful action by China's leaders to rekindle growth, some officials attribute the government's caution to fears of reigniting inflation.

The currency war is in full swing and soon the media will have no choice but to bring it into the spotlight. In the end, there will be winners and losers.

Americans who are prudent savers and those living with pensions, whose fixed returns are overly devalued by inflation, will be on the losing side. The winners are those who hedge against inflation using leverage and hard assets such as gold, silver, real estate, and fine art.

A Bad Month for Gold

September is over and we're now heading into a month where gold has traditionally not performed as well. We've seen gold and silver prices rise over the last few weeks, so it wouldn't shock me that we see a pullback. October is also generally a more volatile month for both gold and stocks.

Keep in mind that central bank buying, investor demand, and mine strikes in Africa (100,000 miners and transportation workers on strike in South Africa) could cause supply constraints and force gold higher, even in a month where gold has often been down.

Should gold prices follow historical trends for October along with stocks, it would represent a great buying opportunity. Over the past 40 years, November has generally been one of the best months for gold, second only to September.

However, in the last decade, as seen in the above chart, November has been the best performing month.

In the past month, we have seen gold and silver stocks significantly outperform their metal counterparts. This trend should continue. Pullbacks in October represent a major buying opportunity in the sector - especially if gold follows the same trend as it has for the last 10 years.

In the next few weeks, I'll be making some visits to various mine sites to look for more winning gold and silver stocks.

Watch the Throne

US elections are coming and everyone will be watching to see who gets the throne.

Some will say democrats are better for the stock market (as shown by historical data). Others will say Republicans are better for the economy. Historical data suggests that the stock market performs best under a divided government, when the party that controls the White House differs from the majority party in Congress. In fact, it seems best for Wall Street when we have a Democratic president with a counterbalance of a GOP-led Congress; just look at the last four years.

If the Dow is up in the two months prior to the election, the incumbent almost always wins.

If Obama wins, you can bet that Helicopter Ben Bernanke will be given another term as head of the Federal Reserve.

I doubt Romney will win. Even if he does, and Bernanke is out, there is no stopping the printing press. Once Romney sits in the chair and opens the books, he will realise he's screwed.

Let the money rain.

A lot of experts may tell you to sit on the sidelines, but you don't make money sitting there - especially if prices go up and your dollars go down.

"I care not what puppet is placed upon the throne of England to rule the Empire on which the sun never sets. The man who controls Britain's money supply controls the British Empire, and I control the British money supply." -

Baron Nathan Meyer Rothschild

Do you know who controls the US money supply?

Until next week,

Ivan Lo

Equedia Weekly