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Gold: The only currency that can't be printed

Contrarian Chronicles
Gold: The only currency that can't be printed
The world is starting to see that it's not just the dollar that has serious problems. Brewing financial crises and weak currencies make gold the best choice for crisis protection.
By Bill Fleckenstein
Posted 4/11/2005

As far back as April 2003, in a speech I gave at the Las Vegas Precious-Metals Conference, I stated that gold would benefit from an inevitable economic crisis of confidence (which could be postponed but not avoided). Now, nearly two years later, it is my belief that the catalysts for this crisis are here. This week I will focus on one of them, the dollar.

The buck stops at the editorial page
Growing concerns about the dollar, in fact, prompted editorials in both The New York Times and the Financial Times (known as the FT) a week ago. The Times' April 2 editorial, "Before the Fall," takes exception to the sanguine viewpoint "that foreign central banks won't risk the losses in their dollar reserves that would occur if they started shunning dollar-based investments." In brief, the editorial warns, "the United States is betting that it's too big -- in other countries' eyes -- to fail."

The limits of foreign largesse
The Times also warns that if foreign central bankers decide to stop buying our dollars, we may need to "borrow in the face of an ever-weakening dollar -- a recipe for higher interest rates and higher prices." Further, it notes: "If the economy is in a housing bubble, as many analysts believe, higher mortgage rates would pop it, with dire results for homeowners' balance sheets and the overall health of the economy."

I suspect that "dollar bag holders," i.e., the foreign central banks, won't feel comfortable reading this, and it will strengthen their resolve to lighten their dollar positions. From a perversity-of-markets standpoint, though, the fact that the editorial board of The New York Times felt so compelled to write this editorial may mean that the dollar bounce will continue.

Meanwhile, though I have been bearish on the dollar for some time -- and think it's headed lower over time -- I would not have spoken as forcefully about the immediate future as the editorial did here: "The recent rally of the United States dollar notwithstanding, the greenback has nowhere to go but down . . . The dollar's current uptick is just a breather in its overall downward trajectory . . . The dollar is heading down, no matter what." I say that because, as anyone with any experience in the financial arena knows, in the short run, markets can do anything.

However, I think it's worth noting that The New York Times editorial page dislikes the present administration so much that it has a bit of an agenda. Thus, its argument may be seen as more political than heartfelt economic concern.

The euro: An anemic alternative
Now for a look at the Financial Times' April 2 editorial, "Crosscurrents Make Currencies Choppy," which I think will also put pressure on foreigners left holding the dollar bag. Unlike The New York Times piece, the FT gets at the trickier problem of the dollar going down against what: "The euro does not have much to recommend it, other than not being the dollar."

That's emphatically what I believe. Though willing to own euros in the past, I have owned them primarily for the same damning-with-faint-praise reasons as described by the FT. As I have said many times, most currency choices are just battles of wits amongst unarmed opponents. In other words, they are only "relatively" attractive versus each other and not genuinely attractive on their own.

The FT correctly points out that, although Europe and Japan could solve their problems without their currencies tanking, "solving the U.S. (trade deficit) problem almost certainly requires the dollar to weaken further on a trade-weighted basis."

Lastly, the paper comes to a conclusion that I have come to -- and that the rest of the world (including Asia) will ultimately come to:

"In truth, there are good reasons for selling all three of the world's main currencies. But could they all fall? Yes, against either gold or the Chinese renminbi. In recent years, gold has been a useful hedge against the dollar, but not against the euro or yen. Meanwhile, the U.S., Japan, and the EU would all like to see the renminbi revalue, but so far, the Chinese are not playing."

Turning over a new gold leaf
I think that for the FT, which has been known as a very anti-gold publication, to come to this conclusion means that people who have not liked gold are re-examining their viewpoint. I think this will be a positive for gold, notwithstanding the many down days it has endured. Often, seismic shifts in thinking unfold in slow motion, as I have noted with respect to many of our corporate scandals. (Editor's note: The metal is down more than 7% since Dec. 1.)

The combination of problems in our country's financial system (think Fannie Mae (FNM, news, msgs), MBIA (MBI, news, msgs), American International Group (AIG, news, msgs) and General Motors (GM, news, msgs)), our inability to do anything to strengthen the dollar, the inherent weakness of other currencies and our inflation rate (which, while clearly not alarming, is running higher than any rational person would like to see) is exactly the recipe for a much higher gold price.

Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column on his Fleckensteincapital.com site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC on MSN Money. At the time of publication, Bill Fleckenstein was long Fannie Mae puts and short General Motors.


LINK: http://moneycentral.msn.com/content/P113717.asp