The New Yorker discovers and gets snide about gold


By Dan Ackman
Monday, November 22, 2004

On Friday in Frankfurt, U.S. Federal Reserve Chairman
Alan Greenspan hinted, without actually predicting, that
the dollar was getting weaker. On Sunday in Berlin,
U.S. Treasury Secretary John Snow said at the Group
of 20 economic conference that he wasn't talking about
the dollar, but that the U.S. would cut its budget deficit,
which would likely strengthen the dollar.

On the same day, half a world away at a summit in
Santiago, President George W.Bush said he told fellow
world leaders, "I reiterated that my government has a
strong dollar policy," and he added, "And the best way
to affect those who watch the dollar's value is to make
a commitment to deal with our short-term and
long-term deficit."

While all this was going on, the dollar was hitting new
lows around the world, and, in Washington, the federal
debt ceiling was being raised to new highs. Late last
week the U.S. Congress approved an $800 billion
increase in the nation's $7.384 trillion debt limit, the
third lifting of the debt ceiling since President Bush
came to office. The 208-204 vote was unusually close
for a measure that is widely viewed as necessary for
the government to function.

The next day, at the European Banking Congress 2004
in Germany, Greenspan "speaking for [himself] and not
necessarily for the Federal Reserve," issued what
seemed to be a warning, however obscure. With the
U.S. current account deficit rising to a quarter of gross
domestic product, non-U.S. investors will likely wish to
reduce their cache of U.S. dollars: "International
investors will eventually adjust their accumulation of
dollar assets or, alternatively, seek higher dollar returns
to offset concentration risk, elevating the cost of
financing the U.S. current account deficit and rendering
it increasingly less tenable," he said.

Later that weekend at the G-20 in Berlin, Snow said,
"Exchange rates were not on the agenda." But they were
being discussed over coffee during breaks. "I would be
lying to say that we did not talk about it," German
Finance Minister Hans Eichel was quoted as saying.
Meanwhile, the dollar hit a record low of $1.31 against
the euro and is currently perched at its weakest level
in four years against the Japanese yen.

European finance ministers are worried that the euro's
strength against the dollar will damage economic
recovery hopes by making their exports more
expensive. But Snow said that the Europeans need to
take care of their own economic growth.

Bush's comments at the Asia-Pacific Economic
Cooperation summit in Chile borrowed a line from Snow
that Snow had borrowed from Robert Rubin, the
Citigroup executive who served as Treasury Chief under
President Bill Clinton. Snow, for the moment, seemed
tired of saying it. Bush pledged to present a plan to
Congress on ways to reduce the fiscal shortfall.

"I think what we are looking at is the mantra is being
repeated," says Kathleen Stephansen, an economist
at Goldman Sachs. "It gives you the scent of benign
neglect and that they are not at all averse to the
weakening of the dollar." A weaker dollar stimulates
U.S. exports, which offsets the effect of the Fed's
recent interest rate hikes, Stephansen adds.

At the moment anyway, investors don't seem to be
taking any of the pledges of a strong dollar seriously.
One sign is the rise in the price of gold to nearly $450
per ounce, a 16-year high. Also last week, trading in
streetTRACKS Gold Shares (GLD), an exchange-traded
fund on the New York Stock Exchange, set a volume
record for any derivative, ETF, or structured product
listed on the NYSE, and the price continued to rise
by just less than 1 percent on Friday.


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