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Current State of the Dollar and Fed Policy

Blog Nov 19, 2010

On November 16, 2010, Steve Liesman of CNBC, interviewed New York Fed President William Dudley regarding Fed policy. And I quote Steve Liesman, “New York Fed President, Bill Dudley, in an exclusive CNBC interview, taking on foreign critics and domestic ones of Fed policy. Saying that those including the German Finance Minister, who contend the Fed is aiming to weaken the dollar, they have it wrong.”

That is like saying that I pointed my .30-06 rifle at the deer’s heart and pulled the trigger but I wasn’t trying to kill him! We all know the consequences of such action and just as surely as shooting a deer in the heart with a .30-06 will kill it, so too will quantitative easing weaken the dollar! Not to mention the mounting budget deficit and a national debt that now exceeds $14 trillion. I call it a catch 66, which is three times worse than a catch 22!

Who listen’s to these folk’s anyway. I have written and stated many times before, if you are expecting the Federal Reserve or the Secretary of The Treasury to come out and warn that they are targeting the dollar, that they want a weaker dollar, it isn’t going to happen.

One has to understand that to do so would create a huge run on the dollar because every knowledgeable trader, institution and government would sell their dollars in a heartbeat!

No, as I have said many times before, there may be rumors of a strong dollar policy and there may be rallies in the dollar for a short period of time, but the dollars future is baked into the cake. That is why gold has been rising steadily since the gold bull market began in August of 1999, and without much public participation I might add.

I think it is significant that gold has been rising but not in what I would call a crisis environment. Yes, we have been in the worst recession in the post World War II era and we have high unemployment, but we are not in an all out dollar collapse or deflationary crash at this moment. Imagine what would happen to gold if we were in an all out crisis.

I hear talk of gold at $7,500 or $9,500 an ounce and in the same breath you might hear the word hyperinflation. I find it laughable to think that with hyperinflation that we might see a gold price of $7,500. When Germany experienced hyperinflation, which began to set in earnest around January 1919, it took 170 Germany Marks to buy one ounce of gold. By November 30, 1923, it required 87 trillion Marks to buy one ounce of gold.

As I see it, if hyperinflation takes hold in the United States, the home of the World’s Reserve Currency, the gold price will rise off the charts as it did in Germany. That is what a crisis such as hyperinflation will do to your currency.

But right now the Fed is fighting deflation and big money, smart money is taking out insurance against both deflation and inflation by buying gold.

Now one final word. The dollar registered 121.20 against the dollar index in July of 2001. Since that time it has fallen over 41% to its low which hit 71.33 on April 22, 2008. Since then the dollar has rallied to as high as 89.17 on March 09, 2009. The new low for dollar stands at 75.63, which occurred on November 04, 2010. The dollar is oversold and due for a rally but if and when the April 22, 2008 low 71.33 is violated there is no bottom for the dollar. A GOOD REASON TO OWN GOLD!

Craig P. Griffin
President

Thumbnail Photo We believe that everyone deserves a properly developed strategy for financial safety.

Lynette Zang

Chief Market Analyst, ITM Trading

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