“Anyone who has not appropriately hedged his position by now is obviously desirous of losing money.”

These words regarding owning bonds despite the Fed’s well known present policy were uttered not from just another Wall Street talking head, but from the chairman of the Federal Reserve on November 20th at a Group of 20 nations’ meeting of central bank heads and finance ministers held in Berlin.

In the almost thirty years we have known Alan Greenspan we have never heard him make such a blunt public comment.

Mr. Greenspan also let the Genie a little further out of the bottle when he said, “It seems persuasive that, given the size of the U.S. current account deficit, a diminished appetite (on the part of foreigners) for adding to dollar balances must occur at some point.” In just plain English, foreigners, at some point, will slow down their dollar buying in one form or another as the allure of the almighty dollar continues to diminish.

At the time of Mr. Greenspan’s comments, gold hit a 16-year high, and the dollar dropped to a four-and-a-half year low against the yen and a record low against the euro.

(The Federal Reserve tracks foreign dollar ownership by recording the amount of US Treasury bonds they own. When foreigners want to own dollars, they do so by purchasing US Treasuries.)

One of the primary issues at the G20 meeting was to address the fact that the U.S. current account deficits are in excess of 5% of US gross domestic product. Foreign buying of two billion dollars a day is necessary to support this deficit.

The Chinese currency, the renminbi, is effectively pegged to the US dollar. China’s reserves are currently $515 billion. Add in Hong Kong and Taiwan and the pot becomes $870 billion. As China is today’s 800-pound monetary gorilla, we found the following comments from the Chinese to be noteworthy.

In an interview which we quote in part from the November 23rd Financial Times Mr. Li Ruogu, the deputy governor of the People’s Bank of China, warned the US not to blame other countries for its economic difficulties.

Mr. Li said, “If there is a small (Chinese) deficit, we are not concerned. But certainly we don’t want to run into the US situation of having a trade deficit of 6 per cent of GDP.

That is not sustainable,” he added. “The appreciation of the renminbi will not solve the problems of unemployment in the US because the cost of labour in China is only 3 per cent that of US labour – they should give up textiles, shoe-making and even agriculture probably.

They should concentrate on sectors like aerospace and then sell those things to us and we would spend billions on this. We could easily balance the trade.

The Chinese have come a long way in the last 26 years from being a predominantly agrarian economy to advising the United States on how to manage its economy. We wonder if Mr. Li’s words represent the official position of the People’s Bank of China?

Our concern is about the possible consequences if foreign investment in the dollar were to fall short of two billion dollars a day or, far worse, if there were a reversal of the flow of funds and foreigners were to begin repatriating their currencies by selling dollars. They can do this by selling US Treasuries – the opposite of purchasing dollars as explained above.

If so, results could be: bond prices go down, interest rates go up, the dollar goes down and gold goes up. Perhaps the dollar goes way down and interest rates go way up.

Not to be underestimated would be the likely impact of significantly higher interest rates on the record debt held by the US consumer and the potential effect on the stock market.

An example of the financial markets’ sensitivity: On November 25 the China Business News reported that Yu Yongding, a central-bank official, said China had sold US Treasuries. The bond markets sold off sharply, and the dollar continued its slide. Mr. Yongding later denied making the statement, but the markets did not reverse.

If the US truly wants a strong dollar, the Administration and Congress will have to work very hard to reach that objective. The dollar is a horse that is very close to being out of the international currency barn.

We, however, do not believe a strong US dollar has been or is a primary goal of the Administration despite repeated comments by John Snow, Treasury Secretary, that a strong dollar is US policy and in our best interests.

Remember, no country has ever been unsuccessful in debasing its own currency. That is the single thing governments do best.



On November 18th, the first gold bullion-backed exchange-traded fund opened on the New York Stock Exchange. At the end of three business days $1.3 billion had been invested in the shares that trade like other NYSE shares. The name is StreetTRACKS Gold Shares; the symbol is GLD; the sole assets are gold bullion and cash; estimated expenses are 0.40%; and, the price of a share is approximately 1/10th of an ounce of gold.

The Trust’s mandate is to buy and sell gold bullion. The physical gold bullion is held by the Custodian, HSBC Bank USA, in its London vault or in the vaults of sub-custodians. The Trustee is the Bank of New York. GLD’s telephone for information and a prospectus is 866 320 4053. The Web site is: www.streettracksgoldshares.com. (Our comments are neither a recommendation to purchase or sell these shares.)

Very best wishes for the Holidays!

John W. Hamilton
December 3, 2004