I appreciate your insights and evaluation and find one more scenario that is the only one that makes sense to me. Lets call it E for emerging markets are the only game in town. This scenario is that all this cheap money the fed is making available to the really smart Goldman traders is going to wherever there is a believable story that economic recovery is possible. After all emerging markets are where this rally started and are really bigger than the US stock rally. US stocks are just responding to that.

When reality hits about the overcapacity in China, and that no economy can replace the US (US consumer is not only in debt, undersaved but also aging with 80 million retiring soon) I think all the risk assets that have gone up nicely this year will come down, the dollar carry trade will unwind, and the dollar will go up until they start to print more dollars. Maybe Bernanke will take a trip to my birthplace of Argentina and learn from my cousins how to run the printing presses. That takes me back to gold. See why I think it is great insurance. I am no longer worried about the return on my money but the return of my money and I am no longer considering fiat currencies safe if there is no economic recovery.

As noted in the letter, I don’t think anyone ‘knows’ how this is going to play out. But I do not believe markets know any more than you or I do. People are buying gold as part of the V-shaped recovery story, demand from China expectations, inflation expectations, and money chasing whatever is working right now. When the S&P made it’s high in 2007 was it ‘telling’ everyone that the credit crisis was over? Or the Nasdaq in 2000 was telling us the New Paradigm was real? If, as I think likely, the coming dip in the economy is deeper than expected, commodities are going to get hit, and maybe hard. If that occurs, what does that imply for inflation later next year? This is why I think technical analysis must be used in conjunction with fundamental analysis to first stay with a positive trend, but being able to observe when the trend is turning, especially if the coming turn down in commodities jives with the expected coming dip in the economy.

And you’re right, the euro is setting up for a large decline. Their banks are in worse shape than the banks in the US. Japan is a basket case, so the Yen is vulnerable too. A decline in the Euro and Yen will lift the dollar. Business Week asked this question on their cover, “What happens If the Dollar Crashes” with the words Dolalr Crashes in red. Just in case we didn’t get their verbal meaning. thanks for your comment.

Jim

Thanks. I look forward to your reading it! You might want to buy a bit more time than November. Sometimes things just take longer to develop.

Good Luck.

Jim

Great mnds thinking alike! Well, if we’re wrong, we’ll at least no we have some company. Thanks for your comments too.

Jim

Wouldn’t you read Gold prices as a forecast or estimate of probability for scenarios A to D? An input rather than output. Then, possibly, the gold prices are indicating that probability for scenario D is higher than 20%. (I would allot 30% to D and 20% to B – though C remains most likely).

Other part of argument, if people are anti-dollar and pro-gold, it means they are not comfortable with other developed world currencies Euro, GBP, JPY, AUD or even the developing world like CNY. So then doesn’t it imply that one or more of these (developed world) currencies will blow-up before dollar does?

To take it a bit further, such currency implosion will strengthen the dollar till finally fundamentals will catch up with it. In fact this process itself will stress the dollar fundamentals.

I have it pegged for 2011. I’m early and I know it. I can afford to be patient. Thanks for sharing.

You’re right. My call on the dollar is based on the excessive bullishness about gold and bearishness toward the dollar in the near term. In addition, the assumption most are making is that the Fed and other central bankers are going to be successful in halting the march toward deflation. They probably will be successful, but the outcome is more in doubt than the consensus realizes. The notion that inflation is a sure thing because of QE is too logical to be taken at face value. The old definition of inflation was too much money chasing too few goods. We have just the opposite. There is too little money chasing too many goods, in a world of excess capacity, and an environment where credit growth is contracting. If I’m right, another bout of deflation in 2010 will help the dollar hurt gold, oil etc. But after that, the response from the Fed and Congress, and other central bankers will bring the rush out of all currencies you are expecting.