GOIH Market Overview--10-15-07

Our models indicate the market to open lower today based on oil closing above $85 per barrel and the Dollar weakening against the Euro to 142.21 and the Yen 117.84 showing some strength.

We have received several questions regarding the dollar weakening and the effect it will have on the ordinary consumer. We will attempt to answer that question as follows.

There is a delicate balance between the value of a currency and the purchasing power of that currency. The dollar is in an especially good position as the reserve currency of the world, i.e., most major assets are priced in dollars. What this means is the Asian and European countries that import oil and other major commodities must sell their currency and purchase dollars to pay for the imports. Thus this strengthens the dollars relative to the other currencies. However, because the U.S. imports so much more than it exports, the world is flush with dollars, thereby negating the reserve currency benefit the dollar would experience without the trade deficit.

Actually the trade deficit has caused so many dollars to be available for purchase that there is a silent movement to take the dollar off as the reserve currency status and make the euro the reserve currency.

What effect would this have on the economy?

If the euro replaces the dollar as the reserve currency, this means that to pay for its imports the U.S. importers would have to sell dollars and buy euros further weakening the dollar relative to other currencies causing a further spiral in relative value.

Because the largest import into the U.S. is oil, just pricing oil in euros would have a major shock to the consumer as the dollar would fall to 2.0000 to the Euro creating inflation on the imported goods going past 20%. The Fed's hands would be tied and would have to raise interest rates to futilely attempt to tame inflation which it would lose the fight as the costs of the import would continue to rise as the dollar continued to fall.

What would cause the Euro to overtake the Dollar as the reserve currency for the purchase of major resources?

Our economic models predict if the U.S. trade deficit continues to increase flooding the world with dollars that purchase less, the parity point being when the Euro spread relative to the dollar reaches a rate of change greater than the government’s inflation number the run on the dollar will begin and the end will be in sight.

Once the dollar is not longer the reserve currency, the ordinary consumer will be working for peanuts as their wages will not be aboe to afford anything of value.