Beware of Cheap & Easy Optimism

Friday, 23 May 2014
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Published in Gold Investing
Beware of Cheap & Easy Optimism PhotoDune.
As though a rip-roaring stock market hasn't been hard enough on the gold price, the yellow metal has been hit hard by the US dollar and a widespread wave of economic optimism in this last week. Reuters yesterday pegged the dollar index up 0.2%, and the greenback itself up 101.79 over the yen.

First-Strike

Much of this optimism seems tied to a Commerce Department report of a 6.4% rise in the level of new-home sales to a seasonally adjusted annual rate of 433,000, and the fact that this number exceeds a forecast by economists.

For those of you who look at these developments as a reason to delay or abandon a planned gold purchase, we would remind you that a) we've often seen this kind of hype about the US dollar through the years, and that b) the optimism of economists comes cheap and easy these days. Economists are still measuring housing growth on the depressed numbers brought about by horrible weather in February, when home sales dropped 4.4%.
We think though that economist Ian Shepherdson of Pantheon Macroeconomics has a more sober and realistic take on the housing picture. He anticipates that sales will decline as interest rates rise later this year. Add to this a tepid survey in home construction for the remainder of the year from the National Association of Home Builders.

The conventional defense against arguments that the US dollar will eventually tank is that, if it’s to fall at all, it has to fall against something. And there is no something anywhere to be found: not the yen, not the Chinese renminbi, and, goodness knows, not the Russian ruble. The US dollar, according to this notion, is still the reserve currency of the world after all.
Only last August, Forbes columnist Eamonn Fingleton eloquently addressed the undisputed esteem of the dollar. He points out that America is suffering an enormous balance of payments dilemma, and the dollar will not be able to withstand the damage which is sure to occur in the next five years. He advises investors to buy yen and euros to offset this damage in their portfolios.

Not a bad idea at all. We would like to suggest that an equally fine if not better idea is for investors to buy gold. Once the greenback takes the hit, gold will be poised for a steep price increase. The inverse relationship between gold and the dollar is perennial — and well worth planning for in the coming months.

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