Gold and the Dollar: Putting the Relative Cart before the Relative Horse

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...To me and my fundamental mindset, this current US dollar move puts the cart before the horse. You see, the base of all this is the country's economy. A strong economy is the horse, and its currency is the cart. If the economy is strong, this will be reflected in its currency...Otto Rock

I'm not a goldbug. Way back on April 16th I wrote as part of this post, "Give me a fundamentally sound reason to buy the dollar, and I will." I don't belong to the world of kneejerk hatred of fiat currencies, conspiracy theories and suchlike. For one thing, there's a big difference between the utopian world of the perfectly smooth capital market (doesn't exist) and the wholesale manipulation paranoia promoted by GATA and company. For me, being dollar bull/dollar bear is all about the macrofundies, and up to now the structural weaknesses in the dollar have precluded me from buying into the currency. At the same time gold has seemed to me a far better alternative as a means of capital preservation...

The question I've been mulling over this morning is "Is the current USD move from approx. USD 72 to approx. USD 77 backed up by the sound fundamentals I need?" (and if you're wondering, YES, this is the type of baloney a financial wonk thinks about while laying in bed late on a Sunday morning...sad, ain't it?).

Here's what I think: The dollar's move has been backed up by China's central bank buying into US treasuries in a direct way (i.e. via the New York Fed deposits mentioned in this post and looked at in far greater detail by the excellent Brad Setser in his blog). The $29bn noted by Setser is a very large chunk of change, and by pumping it straight into treasuries the US gov't has successfully rallied the dollar. Once the ball gets rolling, more money jumps on and the rally snowballs. Here we are today. But is it a fundamentally sound position?

To me and my fundamental mindset, this current US dollar move puts the cart before the horse. You see, the base of all this is the country's economy. A strong economy is the horse, and its currency is the cart. If the economy is strong, this will be reflected in its currency...

The current Chinese "quiet bailout" is only a temporary measure. Once it stops the real structural weakness of the US economy and therefore its currency will show through again, and the USD will drop...

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