To better illustrate the polarization which currently defines the views of most market-watchers, we will leave you with quotes from the two or more dollar-view camps that have emerged since Friday, and are trying to drown each other out with vocal forecasts:

1. The Deflationists. "As details of Treasury Secretary Henry Paulson's plan to revive the U.S. financial system by pumping as much as $700 billion into the markets emerged Sept. 19, bond investor Michael Cheah was reminded of Japan. When that country's real estate bubble burst, leaving a trail of bad real estate loans, officials flooded the economy with cash only to see banks hoard the money instead of lending it out. The result has been a series of recessions and persistent deflation for more than a decade.

``Although the government tried to debase the yen by printing a lot of government bonds, the economy went into a standstill,'' said Cheah, an official at the Monetary Authority of Singapore from 1991 to 1999 who manages $2 billion at AIG SunAmerica Asset Management in Jersey City, New Jersey. ``The banks used the money to buy safety. I see a repeat happening here. The banks will use it to buy Treasuries.''

We might add out own take to the above, by noting that when Japan went into the deflation tunnel, the average household had nearly a quarter of a million (dollars' worth) of savings to see it through the contraction. Not quite the picture currently in the average US household...

2. The Inflationists. ``The downdraft on the dollar from the hit to the balance sheet of the U.S. government will dwarf the short-term gains from solving the banking crisis,'' said David Woo, London-based global head of foreign-exchange strategy at Barclays, the third- biggest currency trader, according to a 2008 survey by Euromoney Institutional Investor Plc."

3. The "Trouble-Now-Benefits-Later" Fence-sitters. "Although the dollar may suffer short-term, at least one analyst says the U.S. government's planned rescue will strengthen the currency before long. Paulson's proposals will return foreign-exchange markets to the trend of the past months, according to Adam Boyton, senior currency strategist at Frankfurt-based Deutsche Bank AG, the world's biggest currency- trading bank. Since the end of June, the Dollar Index has gained 7.2 percent. ``It's a positive plan that's ultimately good for the dollar,'' said New York-based Boyton. ``It reduces risk and volatility and gets the focus back on macroeconomic fundamentals, which suggest weakness throughout the rest of the globe next year, with returning strength in the U.S.''

Any wonder, then, that investors are mimicking headless chickens? With profuse apologies to Led Zeppelin:

Been dazed and confused for so long its not true,
Wanted only profit, never bargained for you.
Lots of people talk and few of them know,
Soul of the markets was created below. yeah!

Try to love you greenback, but you push me away.
Don't know where you're goin'
Only know just where you've been,

Been dazed and confused for so long, its not true,
Wanted only profit, never bargained for you.
Take it easy Paulson, let them say what they will.
Will your tongue wag so much when they send you the bill?

Marketwatch will live up to its true name today. So will other news agencies. Staying liquid and watching has untold benefits at the moment. Keep the 10% core gold position in place. Raise the allocation of long-term holdings by 5% on major dips. If losses are taken in other sectors, mobilize 5% on significant rallies. Do not take this as advice; they are merely prudent possible choices. Speculating and betting large at this juncture is to be done only if you have money to burn.

Jon Nadler is Senior Analyst, Kitco Bullion Dealers Montreal

Post your comment  (0)

Connect:

Post to Twitter

Post to Facebook