+ + the usd, euro, gold, trade and deficits + +

THE USD, EURO, GOLD. TRADE AND DEFICITS.

G. Stolwyk

I am just writing a preliminary analysis of the possible outcomes while we are having the fallout of the rejection of the European Constitution.

It is not wise referring to any possible internal wrangling amongst the Europeans, so it is best to paint the economic picture and wait for developments.

1. The Euro currency and trade.
EURO/USD of 1.30 was tolerable but it has now fallen to 1.24, a drop of 4.6%, a handsome number in the export trade.

So, unless something negative happens, it will benefit them. Imports will be more expensive.

It won't cure the unemployment, now running at 12.5 mill for Germany and somewhat less for Italy and France. There is little doubt that economically, the leaders made a mess of it.

It is difficult to predict which way the Euro will move because we don't know the medium and longer term flow-on effects from this negative vote and unemployment levels and a likely further economic deterioration.

Growth rates are already minimal. Interest rates tend to be higher in the US and this could reduce the flow of savings to Europe.

Therefore, this currency is a conundrum to the overseas investor, IMHO.



2. The USD, trade and the Current Account Deficit.
The somewhat higher dollar will tend to make imports a shade cheaper but it isn't good for desperately needed exports which only run at 8% of GDP.

If nothing happens to the Chinese currency for some time, then consumption would decline slightly slower or slightly increase depending on oil prices.

Their Current Account Deficit would increase because of the translation into more expensive USD.
My prediction was for 6.5% of the GDP this year; I won't change that just now.

The wars in Afghanistan and Iraq are proceeding but not according to plan. We don't know if Bush has designs on other countries as well. Neither can we gauge any very negative outcomes from other causes, eg derivatives shocks.

Now is the time for countries to dispose of some USD at the current rates. However the current high USD could attract more savings to finance the Current Account Deficit. They may still need to call on their Caribbean Banks though.

The last time the Current Account Deficit included $US6 Bill from the sale of planes to India. Unfortunately, it was a contract and the planes hadn't even been manufactured. Still, they could try this trick again.



3. GOLD .
I believe that Gold will shake loose from the Euro at first at these low Euro values.

Because of uncertainties in Europe, the Middle East and other countries could look for other strong currencies and *Gold* to diversify and reduce their Euro Holdings.

The USD's value is nothing to be proud of: the masssive deficits are growing all the time; Apart from this, much needed US infrastructure work is not done and energy reserves, distribution and refineries are deteriorating.

So, I don't think that being overweight in USD is desirable either. That ought to reinforce the status of gold, particularly at the current price ($US417).


4. SUMMARY: Europe will push exports and we will see a speed up of the trade wars. European demand for imported goods will decline and the internal situation is likely to deteriorate further: The Euro 's value is difficult to predict.

The US has an Export handicap because of the higher USD. Massive deficits continue to grow and are not likely to be reduced in the present circumstances.

Therefore, the USD has a much inflated artificial value and that may not remain so.

Both the Euro and USD are suspect.

As a consequence, the Middle- and Far East will be adding more Gold to their reserve currencies IMHO.
This course may well be followed by other countries.

I do think that the outlook for Gold and Silver is good once the current situation unfolds and is better understood by the market. Production of Gold is declining.

That is my opinion.
Readers, please do your own research and you decide if and when to buy, hold or sell any stocks or metals.