Gold, Dollar, Interest Rate and Equities

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Dear Investor

I believe, my investors should be more than happy as Gold is scaling new highs, Dollar is Falling and Interest Rates are climbing as predicted earlier in previous newsletters.

Gold:
I believe, You all are still holding on Gold and reaping benefits of newer highs.

I have been writing since last 2 years, recommending Gold, forecasting target of $2200. It directly implies that Gold has traveled only half the journey it is destined for.

Does that mean, Gold can be bought at current levels?

Yes, absolutely. I have no doubt about my target projection of $2200 and Gold can be bought at current levels for multiple fold returns. I am of the opinion, now Gold is about to enter into vertical rally after long consolidation period.

Gold has remained broadly into consolidation ranging between 1080 on lower side and 1240 on higher side. Recent breakout above 1270 does pose significance.

What will drive Gold higher?
All forces, I discussed earlier like lower production, higher demand, currency devaluation, sovereign risk are still acting as catalyst for higher Gold prices. But,I would stress on later 2 forces.

Currency Devaluation: there is fierce battle being fought between the nations to ensure that its currency is cheap among competitors and its benefits can be extended to boost the exports of the nation.

Some recent facts:
US is putting constant pressure on China to increase Yuan valuation. Thus, ensuring dollar devaluation as China is largest trading partner of US.

Japan has started intervening in currency management after six years as Yen zoom passed 15 years high valuation mark against dollar.
European nations have been working to keep Euro low.

Obama has kept target to double the exports from US and to achieve the target, Obama needs to ensure dollar’s waterfall. Otherwise, US companies can not compete with Europe and rest of the World due to higher dollar valuation.

Hence, rest assured the fight to keep currency low has just begun. It will intensify as Europe,US, UK and Japan starts sinking again in last quarter of this year and in 2011.
Click on below news links to read front line battle of currency devaluation
http://www.bloomberg.com/news/2010-09-15/japan-s-solo-run-on-yen-may-reveal-flaw-in-global-drive-on-export-recovery.html
http://www.bloomberg.com/news/2010-09-15/japan-intervenes-for-first-time-since-2004-as-yen-surge-threatens-recovery.html
http://www.bloomberg.com/news/2010-09-16/geithner-says-u-s-to-urge-china-to-speed-up-too-slow-yuan-appreciation.html

Do not believe Euphoric statements of policy makers and economists. Keep an eye on facts. All recent data including housing, car sales, consumer sentiment and unemployment has been showing that US is still in recession and will remain in recession for exteneded period.

Sales of new and existing homes fell to the lowest levels on record in July as a federal tax credit for buyers expired and U.S. unemployment remained near a 26-year high.

US has now 1.2 crore homes for sale but there are no buyers.

What will be the outcome of currency wars?

The only wayout from current world economic mess is currency devaluation for developed nations.

Reasons: US,Europe and UK tried out to stimulate domestic consumption. Recent data reveles that domestic consumers are in denial to consume at 2007 level and instead prefers to save more. As result of that Unemployment has remained at elevated level near 10%. Home prices have reached below 2003 price levels. Consumer sentiment has remained negative.

And, US had to revise down the GDP growth from 2.6% to 1.6% and will still be revised lower in quarters to come.

Hence, the option left with US, Europe and Uk is to look outside and to increase their exports pie.
This strategy can solve all the problems of developed nations. It can jump start entrepreneurial activities, can lower unemployment level and can increase domestic consumption again.

But, Is it so simple? Heck, no.
The biggest hurdle in the way is their currency valuation. Which keep them out from the competition irrespective of skill, infrastructure and favorable policy regime. Higher currency valuation has forced all blue chip companies of developed nations either to outsource work or to establish manufacturing units in cheap currency nations. This process ships out tens of thousands jobs out of developed nations,which they want to bring back.

Hence, US, Uk and Europe will do whatsoever it may take to devalue their currency. Battle has begun and end result would look like as stated below.

By 2012, World will have new dollar, new Euro and brand new World Reserve Currency replacing existing currencies in valuation.

G20 may decide on synchronized simultaneous devaluation of currencies and thus inflating out the debt problems of the world.

In either of the above 2 scenarios, tangible assets will zoom past the horizons and precious metals will reach to the unimaginable valuations. In this case, Gold may climb upto $ 5000. This is no exaggeration.

Sovereign Risk:
People have forgotten that Greece is still on life support and condition is no different for rest of the PIIGS(Portugal, Ireland, Italy, Greece and Spain). Their Debt to GDP ratios have only climbed higher.

UK and US are also in the same boat. Fiscal deficit, trade deficit and Public liabilities of these nations have climbed further in 2010 and worse they are still in preparation for another stimulus and welfare packages as declared by Fed Governor Bernanke.

Markets:

I continue to recommend to exit from front line IT and Banking.

Broader market is also very near to tipping point.

Regards,
Dhaval
Investment Academy | Baroda | 098255 28815
Blog: Http://investmentacademy.wordpress.com

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One response »

  1. Re: “The only wayout from current world economic mess is currency devaluation for developed nations.

    If the stated value, of “Federal” Reserve notes, declines enough with respect to copper and nickel, the 1946-2010 U.S. Mint nickels, composed of cupronickel alloy, could become somewhat rare in mass circulation.

    The September 16th metal value of these nickels is “$0.0575415” or 115.08% of face value, according to the “United States Circulating Coinage Intrinsic Value Table” available at Coinflation.com.

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