I've been asked repeatedly how the US can possibly face deflation with the Fed dead set against deflation, and while the Fed is using every tool at its command to fire up the forces of inflation.
The answer is that US inflation and the US trade deficit has loaded the nations of the world with liquidity. This outflow of liquidity has resulted in almost every nation vastly increasing its production facilities.
We're now dealing with world over-production. This world over-production is putting pressure on prices from one end of the globe to the other end. The pressure of world over-production is forcing prices (and even the price of labor) steadily lower. This is price deflation, pure and simple.
An interesting case is China, which has become "manufacturer to the world." The 1.4 billion Chinese could easily produce almost all the manufactured goods that the world needs. Furthermore, the Chinese yuan is FIXED to the dollar at a ratio of 8.28 yuan to one dollar. As the dollar weakens, China become even more competitive. So far, the Chinese have ignored the pressure from many nations to allow the yuan to "float" higher. The Chinese like it the way it is, and besides, China has a large unemployment problem. China's leaders know that their best chances of remaining in power is to keep the people employed.
The US is now in the process of losing its manufacturing base to foreign low-priced labor. On top of this the US is building huge and unsustainable deficits. Ultimately something must give and that something is the dollar.
So far, the dollar has been declining in a gentle manner. But somewhere ahead I believe we'll see a panic out of dollars and very probably a panic out of all fiat currencies. The alternative to fiat currencies is gold.
I've said it all along, but I'll repeat it. I think large, informed interests are using this area to accumulate gold and gold stocks at what they consider bargain prices. These people are not anxious to see gold move higher, not now they're not. In fact, I believe they'd be just as happy to see gold move even lower so that it becomes even more of a bargain.
I've been suggesting that my subscribers do the same thing. Use this area to accumulate gold and gold shares and forget about quick profits. This is accumulation time, not "take profits" time. After all, if you sell gold or gold shares here, you're probably going to sell your merchandise for a declining asset, and the declining asset I'm referring to is the dollar.
Posted on behalf Dow Theory Letters Richard Russell, Editor-in-chief
