Tony, I found out how it works - basically, the huge US trade deficit (500 billion or so) last year was offset by foreign bond purchases. Stock purchases were minimal, about 37 billion, everything else (about 400 billion) went into bonds. Basically, the "strong dollar" policy assumes that as US falls into abyss, interest rates on long bonds will decline further, which will cause further purchases of bonds by foreigners. It assumes no fallout from the housing bubble, essentially. If debt starts to cave, I would expect these foreign bond purchases to stop, which will cause a dramatic increase of US interest rates and the dollar collapse. This will cause a collapse of US purchasing power and deflation in the World, but gold is very likely to shoot up, because of de-hedging practices by miners and short covering by big US banks. Jewelry purchases are likely to decline further, but investment demand in gold (de-hedging + investment) for 2002 has grown considerably to about 800 tonnes, and will likely grow further, primarily driven at first by short covering. In other words, from the fundamental perspective, if there is further deterioration of US economy (likely), gold decline seems unlikely. If the US rebounds, this will cause narrowing spreads between corporate and government bonds, which will initially lead to corporate bond purchases and higher dollar. However, I would expect that interest rates will move higher then, leading to bond selloff, eventually. In any event, bonds are sky-high now, prone to a rather large decline
Regards, -Vi |
