Damien Hoffman from WallStCheatSheet.com has offered to share his market insight with Trader’s Blog readers today. Read on to learn what he thinks about gold, the US dollar, and what he sees and predicts will and needs to happen in the US economy.
Damien will also be answering any questions that you might have via our comments section below. We invite you to read the article, share your thoughts, and visit WallStCheatSheet.com.
With India and China's strong demand for gold, it’s the perfect time to look deeper into how markets work ...
Many people are patriotically upset about the US dollar’s descent. However, it has been a direct result of the debt we’ve voluntarily assumed for all types of things including cheap goods and wars. In recent years, we’ve now decided to make matters worse by bailing out banks and propping up the housing market. In years to come, the aging boomers will add another layer for healthcare and social security.
I don’t mention this to anger you, only to face the raw facts which have and will play a very strong role in whether our currency strengthens or weakens. As investors, we must understand that the supply of US debt has exploded and at the same time many countries are losing their appetite for these instruments. This can only mean one thing: further pressure on the price (i.e., value) of a US dollar.
In order for this situation to change, several new strong trends must develop:
1) Our economy must produce real value that others will line up to purchase;
2) As the economy strengthens we must retire a very sizable portion of our debts; and,
3) We must prevent other nations from dumping too much US dollars and debt in their effort to diversify.
If we cannot reduce the supply of our debts or increase the demand for lending to us as a safe/strong economy, we will continue to watch the US dollar slide as hard currencies such as gold strengthen. This may seem elementary, but many times hard to accept since it’s our currency and our perception is very biased.
Unlike gloom and doomers who say the dollar is headed to zero or gold will go to $10,000 an ounce, we believe the dynamic nature of the world will soon present a reason for optimism and new sources of wealth. Although we are not going to predict which of those things will be the winners (e.g., alternative energy, health tech, etc.) or when they will arrive, we choose to keep an open mind to their arrival so as not to fall prey to “buy and hold” gold.
As savvy investors, always ask yourself, “Who demands this good or service?” “Is supply tight or flooding the market?” Over time, you will realize these very basic questions can both make and save you a very sizable portion of your net worth. For example, the tech bubble began its loud burst as new shares of tech companies flooded the market and outstripped demand. Similarly, there was a moment in time when the bidding frenzy for houses slowly quieted down. These signals all occurred months before markets collapsed. It’s our job to survey the current environment to see where and when supply or demand is making a fundamental shift.
Wall St. Cheat Sheet