As the continued deficit continues to command somewhat myopic attention [it was less than expected but still around $60 billion a month], we do well to look at the impact on confidence in the unit as the Trade deficit rolls on month after month year after year. 

In the United States the greenback is money and the only measuring rod of value and has been for hundreds of years. That it could become suspect is almost unpatriotic. But U.S. citizens can see the writing on the wall too. They are fully aware of the inherent and seemingly unreported inflation figures as they experience it in their own lives. They can do little about it, but as is the case in the whole world, accept it. After all if you don’t use the $ what do you use? But as an investment in itself Americans show they are underwhelmed, as their savings levels stay at historic and globally low levels. Yes, the easy credit and a general ‘live now, pay later’ attitude has entrenched itself in American culture, but sagacious Investors know that the time for such attitudes is running out. So when the Trade deficit dropped below $60 billion for the first time in months the market’s damp squid reaction came as no surprise. With last year’s deficit reaching $720 billion and this year’s heading for $750 billion, what’s to be happy about? 

The fact of the matter this week was that the U.S. trade deficit narrowed by 8.4% in October to $58.9 billion. The trade gap is at its lowest level since August 2005. The trade deficit was expected at $63.1 billion. The drop in oil prices is why the deficit fell. The average price for a barrel of imported crude dropped by a record $7.05 in October to $55.47 with the volume of petroleum shipments also falling. America's total foreign oil bill fell to $21.8 billion, 17.1% below the September level. The fall in the oil bill accounted for four-fifths of the total trade improvement in October. 

As part of the draining of manufacturing from the States to emerging countries [not just China] Democrats believe that America has lost nearly 3 million manufacturing jobs in the last six years. 

• The trade deficit with Canada fell by 4.8% to $5.4 billion.

• The deficit with Mexico dropped 11.3% to $5.2 billion, reflecting a record level of U.S. exports to Mexico. 

• The deficit with the 25-nation European Union shot up 34.3% to $9.5 billion.

An inevitable and unstoppable trend is that all non-emerging nations are subject to a draining of wealth either to the oil producers or to the emerging East as it provides cheap, but often equal quality goods to West. The efforts to retain such wealth cannot succeed without protectionism or direct blocks on the imports of such goods. This is unlikely to happen until it has already reached crisis proportions. Such moves have to be preceded by Capital Controls which in turn will be preceded by a major U.S.$ fall. Gold will be above four figures by that time and probably have been there for a while.

Dollar Index: 

Dead $ Bounce

Last few weeks I stated, “The US Dollar Index continued to penetrate supports plunging to 82.50 at the close of last week. Now entering a zone of major support, it should be expected that over the next few weeks, a sizeable bounce is quite favorable. Beware of the implications it may bring to gold, but we see such strength in the gold markets at this point that it is unlikely a bounce will do no more than put a small dent in the short-term picture, allowing gold to consolidate. It will likely take numerous attempts to technically break through the solid foundation around 78-80, but it is more of a question of when at this point.”

This past week saw the bounce from the strong support area around 82.25-82.50 continue. With the index back to 84, above the first initial resistance, a we are now looking at 84.5-85 in play, likely where this bounce will find trouble, stall and reverse. 

© 2006 Julian D. W. Phillips
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