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Market View April 2010: Gold, Goldman & Dollar



Market View April 19, 2010


Goldman, Gold, & The Dollar



More interesting is the the single player named in the suit, Fabrice Tourre, who is not listed as an officer of Goldman, just a junior Vice President.  Are we to believe that a 31-year old junior vice president had the unsupervised authority to transact hundred million dollar transactions with the firm’s money?  It simply makes the suit appear politically timed to help President Obama garner support for a sweeping financial regulation bill, and at the same time showing that Goldman Sachs is not beyond the rules of law – while not really punishing anyone at Goldman, save the youngster who has been thrown under the SEC bus.

If I were a gambler, I’d bet Goldman will be acquitted, but I’m not and we are not exposed.

Gold & the Dollar: Gold and other commodities continue to move higher for many reasons.  There are the fundamental reasons of supply and demand and the money printing reasons.  More than once recently, Ben Bernanke has confirmed that the Fed funds rate will be kept very low, probably for the rest of this year and perhaps even through most of next.

Most developed economies (U.S., Europe, and Japan) have spent more money than they can realistically repay, so the answer is simple – devalue the dollar, and the euro, and the yen.  If that were not the plan, you would not see our Treasury Secretary going to China with hat in hand; asking, pleading, threatening that China should allow the yuan to appreciate versus the dollar.  If the Chinese go along (and I believe they will), as they did for the three years beginning in May 2005, gold and other commodities will appreciate accordingly.  It will make the Chinese citizens richer and their government will likely become richer as a result, too.  Common thinking has it that the Chinese government will lose money on their U.S. bonds, but they have moved from longer-term bonds to very short maturities and may even be compensated by our government for any losses due to the revaluation of currencies.  Regardless, China’s increasing role as a global economic leader and their desire to reclaim their historic position as a leading nation will lead them to appreciating the yuan.

Along with the yuan, the currencies of smaller, growth oriented countries, like South Korea, Malaysia, Taiwan and India stand to benefit from the appreciation of the yuan and the associated acceleration of economic activity.  Commodity exporters like Australia, Brazil and Canada should also benefit.  Besides our investments in these countries, we hold their currencies as an alternative for holding just U.S. dollars when holding cash.  They pay higher interest rates on their treasuries and they are appreciating against the dollar, adding more return to our cash.

While I expect you to hear that the dollar is strengthening since it is clearly better than the British pound, the euro, or the yen, remember that dollar strength is measured against a dollar index that consists of:

You can see that over 83% of the weighting comes from three, very weak currencies, printed by governments who have been overspending for many years more than the U.S., so the dollar may be “appreciating” while it is losing value against hard assets and other, stronger currencies.  Only the Canadian dollar and to a lesser extent, the Swiss franc, add any stable representation to the index.

Just as residential real estate was a significant buy-theme from 2004 thru 2006 and then a sell from 2007 thru 2008, the dollar has been the rotation of interest since the beginning of 2009 and still remains.  Expect gold and other commodities to continue appreciating while the dollar continues a steady decline.

Hope you are enjoying the beautiful weather,





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I can hardly start this month’s letter without a mention of Goldman Sachs and the turmoil surrounding Wall Street’s most prominent giant.  I have to say that considering all the formal regulatory actions already filed against Goldman (almost 300 currently), that this particular one is very interesting.  Interesting in that the SEC has picked one involving a few big players involved in a CDO, which most of America can hardly relate  [CDOs segment a portfolio (in this case subprime loans) into different pools, each having unique risk/return profiles].  The transaction involved always has equal parties short and long the position (like betting on a football game – you know someone else is betting on the other team).

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