Reply #26: Memo to Richard Russell On the Margin Baby [View All]

[54anickel]

This is a long, but I thought interesting article. Back to the inflation/deflation debate.

http://www.goldenbar.com/Briefs/23Jun04EditorialPF.htm

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Thus, before we elaborate further on the dollar, and Mr. Russell's deflation fallacies, let me emphasize that there is no malice or defamation intended here. While I don't personally subscribe to his letter, I have enjoyed the occasional snippets encountered throughout my career and life. His courageous contrarian knack deserves respect if only because it's been correct often enough. And of course it was nice to have him on board the gold bull for a while, even though it's bucked him now.

The objective here is not to change his mind (although that would be nice) or to tell you that the renowned Dow Theorist doesn't know the first thing about inflation; it is to illuminate some of the common fallacies about the subject of money and gold.

Russell's views undoubtedly reflect those of a large segment of the investing population, and so in criticizing his widely read arguments I only hope that you may reflect on some of the common misconceptions in the case for gold.

USD Not Oversold, Don't Take Your Eye Off the Trade Ball
The US dollar has fallen about 30 percent in a little over two years against a basket of trade-weighted currencies, which is about as fast as it has ever fallen. However, there are at least two facts that suggest it is not oversold (on foreign exchange markets):

1) the trade deficit keeps widening (recall, a trade deficit arises when prices rise faster in the domestic economy, or fall faster abroad - in other words, because the dollar is falling slower on the currency markets than it is in exchange for domestic goods and services); and

2) if it weren't for the massive interventions last year by the Bank of Japan and China the US dollar would have fallen even faster than it did (and the trade deficit might then have narrowed).

Indeed, our explanation for the reason the trade deficit has continued to grow is that the Fed's inflation is causing the value of the medium to fall relentlessly faster in the US economy than on the market against other currencies - which is due to the artificial policy induced intervention-related demand by central banks abroad.

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