I have been thinking about how simple, but difficult, investing is. Figuring out the relationship between gold and the dollar was not difficult. Understanding that the ballooning trade deficit would eventually cause the dollar to fall was also easy. The difficult part is acting on your beliefs when no one else agrees with you.
Everyone knows the recipe for investing success: buy low and sell high. But it means that you have to buy when almost everyone else is selling, or „helpfully“ telling you that you should really be buying something else.
The opposite is true when you need to sell: prices will be rising and more and more people will see the light and pour their capital into the sector. At some point prices will be outright expensive and the general sense would be that whatever is driving the boom will continue to do so.
We could still be several years away from the top in the gold price, or the bottom in the dollar, but itís worthwhile to think about your exit strategy now. How will you know when to sell? There are several different strategies successful speculators use to take money off the table; itís not all that important which strategy you adopt as long as you have one.
Since the US presidential election -- three weeks ago -- the dollar has dropped 3.45% against an index of the G10 nationsí currencies and gold is up almost six percent. Even Alan Greenspan is now saying that either the US dollar or the trade deficit has to decline. Both cannot continue rising. I expect both to decline. Devaluing the dollar is the marketís way of correcting the trade deficit.
The trade deficit is a virtual guarantee that the dollar will fall just like the budget deficit will cause interest rates to rise. The combination of a falling dollar and rising interest rates is going to hurt US consumers and US corporations. It also means that the price of gold is heading much higher, in US dollars.
The latter is why I invested in US-based gold exploration companies. Itís the best leverage to the declining dollar that I can think of. If you have a better way to play the falling dollar, let me know.
Paul van Eeden
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