Howard's End: Bank Says Gold Set To Go Ballistic

If the U.S. economy is recovering why are stocks going down? If buying and holding stocks is such a smart idea why is the "smart money" deserting the U.S. dollar and buying into gold? Maree Howard writes.

Neither the U.S. stock market nor the dollar can seem to find their footing. Rather, they stumble through each trading day like a couple of drunks heading home from a party.

Not surprisingly, the U.S. Treasury has reported that foreign investors purchased a net $17.6 billion of U.S. stocks in the first three months of this year - down a whopping 58% from the $41.7 billion they purchased for the same period last year.

Clearly, foreigners are starting to back away from U.S. financial assets.

Even worse, the dollar labours under the weight of a massive current account deficit - a deficit that grows even larger. The U.S. Government announced late last week that the deficit soared to a record $112.5 billion in the first quarter of this year. That's up $95.1 billion in the first quarter of 2001.

While there is still a consensus which expects a strong dollar again next year, that consensus is dwindling with many now wondering whether it will fall even further over time to new lows against the major currencies.

Over the years, huge capital inflows have become the U.S. financial market's single most important pillar but take this pillar away, and those markets will instantly collapse with devastating effects for the U.S. economy, turning quickly into a savage credit crunch.

Throughout the 90s non-U.S. investors were increasingly aggressive buyers of U.S. securities, helping to keep stocks higher during the bubble and keeping them from falling ever since.

But clearly, this tail-wind of foreign investment into U.S. financial assets is running out of puff.

Gradually, smart investors have become aware that the U.S. stock market - and its economy - depends on foreign investors. And the kindness of those foreign investors is wearing a little thin.

They are beginning to see that they have enough dead President's heads pictured on U.S. currency in their portfolios, and they are exchanging them for paper with pictures of Europe, cathedrals, Sir Edmund Hillary, Sir Apirana Ngata and the Karearea - the NZ $5 - $50 and $20 - and to gold.

Yep! - GOLD

Gold has been depressed for more than 20 years through the manipulation of Central Banks. Which means one thing - it's been cheap - until now. When the dollar bubble really bursts watch gold prices skyrocket.

This is not news to Scoop readers - we've told you before. But it is becoming news in mainstream financial and media circles.

Even RBC Global Investment Management Inc, a division of the Royal Bank of Canada, whose gold mutual funds is among the best performing in the world, has issued a recent report to private clients that fully endorses the position of this Scoop correspondent and other "gold-bugs" about the gold market and the world economy.

The U.S. dollar is weakening after rising for much of the 90's and as a consequence fewer and fewer investors will want to hold dollar-based assets.

A vicious cycle is developing with foreign investors pulling the plug on Wall Street along with an increasing desire by the world's central bankers to stop using the U.S. dollar as their reserve currency. But the central banks have loaned (sold) their gold reserves to bullion banks at a ridiculous 1% rate and, as the price of gold rises, they are not likely to get it back - it's gone.

As the head of steam builds central banks will face real trouble with their gold position, more foreign investors will pull their money out of an already beleaguered market and other currencies will rise against the U.S. dollar - and gold?

I wouldn't be surprised if it hit $US500 - the signs are there and it looks like being out of the control of the central banks!

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