Money is Scurrying Away From the Dollar
June 22, 2009 by Brien Lundin
It seems like every month brings up a new opportunity to point out how dramatically the world of gold is changing, and this month continues the trend.
It was only recently that we were fretting over proposed IMF gold sales, concerned over the metal’s inability to break out of a trading range with a low end of around $870, and wondering how the world could have so quickly forgotten about quantitative easing and the dollar destruction it would engender. Fast-forward a few weeks and we see a gold price about $90 higher and the dollar in a free-fall.
I’ve often employed a seesaw analogy to illustrate the relationship between gold and the U.S. dollar. As one rises, the other falls, and charts of gold and the dollar index show that this inverse relationship has reasserted itself over the past few weeks. The only break in the dollar’s fall has come amidst North Korea’s muscle flexing in the form of a nuclear test and assorted missile launches.
It’s ironic that “safe haven” investing now means a flight to the dollar, and the return of normalcy means flight from the dollar. We can take comfort in the fact that things eventually do return to normal… and today that means a far-sighted recognition of the tidal wave of dollars headed our way.
But it has also come to mean something else — something that is even more disturbing than an inflation-spawned dollar destruction. It has now become clear that the new regime in Washington is intent on inserting itself into every aspect of the economy and private business, without regard to the consequences, the rule of law, or even common sense.
It was bad enough when Congress tried to run roughshod over the law in their attempts to rescind the bonuses of AIG execs. But then the Obama administration decided the big banks that took TARP money—some which never wanted or needed it in the first place—wouldn’t be allowed to give it back.
Then it sacked the head of a private company (GM). Then it ignored the legal rights of secured creditors to hand over the lion’s share of Chrysler to a key political supporter, the United Auto Workers union. Then it set about to determine what is and isn’t reasonable compensation for executives in the financial services industry…and no one in the White House thought the idea was the least bit controversial!
It hasn’t ended there: Now we will be told what types of cars we can drive. Now we will be told, by statisticians ensconced in some shrouded Washington bureaucracy, what kind of health care we can have. And we’ll be forced to pay for all of it, in fortune and lives.
Now, obviously, many Americans agree with these political moves. And you might be among them. But there is no argument that the U.S. government is becoming increasingly invasive in relation to the economy, the markets and private business. And this can’t be good for America’s economic future.
What does all this have to do with the dollar and gold? Quite simply, we have to live with the consequences of the leftward tilt in American politics. But foreign capital doesn’t…and it won’t.
Simply put, capital flows to where it feels secure. Where free markets and the rule of law are respected. That’s why you don’t see investors flocking with fat wallets to Zimbabwe. They know that their capital would be subject not to law, but to whim. In short, their funds would be quickly and efficiently confiscated.
America is not Zimbabwe, of course. But we have seen some frightening similarities in recent weeks, as pure political power has repeatedly steamrolled the rule of law.
True, as an investment venue, America doesn’t present nearly the same level of risk as Zimbabwe. But it doesn’t have to be that risky to send capital flying away; it only has to present more risk than the alternatives.
And America currently represents greater political risk than, say, Canada, New Zealand, Australia and Switzerland. Even France can now be regarded as friendlier to capital and wealth formation than the United States.
In a world replete with better options, it doesn’t take much to send money scurrying away from America and the dollar. And that’s precisely what’s happening now.
As my friend and world-renowned trader Dennis Gartman (thegartmanletter.com) recently noted, “We do indeed fear that the U.S. dollar is in jeopardy of falling materially in the coming days, weeks and months in light of the actions taken, and likely to be taken in the future, by the Obama Administration…. “In other words, the tide has shifted. In other words, the tectonic plates are moving. In other words we’ve no choice but to err upon the side of dollar bearishness henceforth. In other words, the game has changed, with new rules to guide us from this point forward. In other words, money will flow from the US to other harbors, and we shall say yet again that the most logical harbors are those that look the most like the U.S. but which are not suffering from the same left-wing, ill advised policies of the present Administration.”
Which brings me back to the same point I’ve been making for months: We will have to endure a sometimes-painful transition from fear of financial catastrophe to fear of inflation. But once through it, we will see gold embark on the most powerful leg of its bull market.
From all appearances, that transition is progressing nicely.