Bet on the Dollar, Not Gold

04/01/2011 8:00 am EST


Andrew Busch

Editor-in-Chief and Publisher, The Busch Update

The greenback is more likely to climb in the second half of this year than gold, which is partly natural market factors and partly a dollar-friendly change in Congress, says Andrew Busch of BMO Capital Markets in this exclusive interview with

I want to talk to you about the US dollar and the markets. Where do you see the dollar going?

Well, it’s a tricky subject because there are quite a few crosscurrents.

I think what we’re going to see is that, because of the strong US recovery—and it’s going to be strong, as opposed to Europe's weak economic growth, with Germany backing down a little bit from the high growth levels that they’ve had—I would say the dollar’s going to outperform this year. Especially if we get into the second half of this year and economic growth in the United States still stays relatively strong compared to Europe.

I expect interest-rate spreads to narrow. If we look at the two-year spread between Germany and the US, recently it shot up as high as 110 basis points. Since then, it’s backed off.

I expect that to narrow even further as the Fed begins to stop quantitative easing in June, but also as the market begins to anticipate that the Fed’s going to pull away from just nailing Fed Funds to zero to 25 basis points. That will move the whole curve up, and that’ll be good for the US dollar.

So I expect the second half of this year to be a very good one for the buck.

How do we play that as investors? Should we really be watching the dollar itself as some kind of harbinger of good things if the dollar gets stronger later this year?

Well I guess it depends on where you sit and where you’re invested, you know.

Multinational companies obviously have earnings overseas, so if the dollar strengthens, that’s not necessarily good for their sales. I mean, they’ll start to go down in dollar terms if they’re in Euros, and so on.

But ultimately what you want is to have a sound currency policy—whatever that is—out of the United States. What that does—and what happened in the '80s with Art Laffer and Ronald Reagan—was that they had a strong dollar that brought in foreign direct investment and it really ignited that.

You could argue the merits of it, but what really boosted that quite significantly is that foreign direct investment soared in the United States at that time.

And yet, US debt, government debt was soaring—or government spending was.

That’s true.

But tax receipts were rising so rapidly that by the 1990s the deficit disappeared altogether, at least the annual deficits.

Certainly. I mean the rapid growth in the tech sector was a boom, obviously, and carried all the way forward to George W. Bush, and we ran these massive budget surpluses.

I think it’s important, too, that there are other things that Congress could do to bring this back to public policy. Eric Cantor, the House Republican leader, has said that he‘s in favor of a new Dividend Repatriation Act.

Back in 2005, the last quarter that we had a dividend repatriation at 5.25%, we saw a significant US dollar rally If they bring something up like that, we could really see a very strong rally at the end of this year.

If we saw a strong rally, with or without dividend repatriation, it seems like you could see gold really break.


And some of the dollar-bust hedges breaking.

Yeah, and I think you know people have bought gold for a number of different reasons. I mean, from an inflation standpoint.

That’s probably chief among them I would think.

A weak dollar, you know, and inflation picking up globally.

Currency crises.

All those things and a safe haven as well—but that starts to lose its luster when the dollar starts to rally and US interest rates start to go up. It’s just a question of, do you want to have your money in a commodity that’s not necessarily going to provide a return? Other than everybody else buying it and having it go up so soon as it stalls out

Do you have a ballpark price forecast then?

We had recent highs of what about $1,450? I don’t think we’ll see those again. I mean we could trade back down to $1,250 pretty easily.

I think we’ll play between $1,300 and $1,450 for a while, and then as interest rates go up in the United States due to demand for money and growth—not inflation—then I think you’ll see gold drift back down to about $1,250 by the end of the year.

That’s as low as you can see it going, even with all this dollar strength.

For the time being.

The dollar could kind of replace gold as the safe haven in that kind of a scenario.

Well, the dollar’s always the safe haven and that won’t change. If you look over history, one of the things that happened when the United States in the '70s went off the gold standard, we had this big debate whether or not the US was going to lose its reserve-currency status—and it didn’t.

Actually, the opposite occurred—at one point, dollar as a percentage of reserves held globally went up to 80%... and then eventually it dropped down, because inflation took off in the United States—but it's really hard to gauge what countries are going to do with their US dollar reserves.

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