The following editorial was published in Price Perceptions Technical Update issue 1213A on March 9, 2002

Steel Tariff Changes Perceptions !

The US decision to place a 30% tariff on most steel imports has angered American allies throughout the world...

  • The EU Trade Commissioner stated: The EU will of course launch an immediate complaint in Geneva against the clear violation of WTO rules. We will take whatever measures are necessary to safeguard our own market.

  • Prime Minister Tony Blair told Parliament: The Bush decision on tariffs is unacceptable, arbitrary, and unjustified.

  • The Russian Foreign Ministry issued the following statement: Steel tariffs go against the grain of procedures and conditions of bilateral trade. Such actions could affect the atmosphere of Russian-American relations.
It is apparent the US tariff decision could become a watershed event for world trade, global stocks, and international currency markets.

The most immediate market response came in the dollar. The dollar index fell through major support on Wednesday and broke the long term uptrend on Thursday.

While many nations reacted immediately to the tariff decision, Japan and China have been conspicuously absent. In addition, China suddenly decided to ease GMO restrictions on US soybeans and grains. Why?

China has the largest trade deficit with the US and Japan is now second. If the US is backing away from long held ideals about free trade, could tariffs and/or restrictions be placed on other imported goods?

It appears that China’s sudden change of heart over grain import restrictions may be a defensive move to insure that tariffs are not placed on Chinese exports to the US. Also, the absence of Japanese criticism could be in fear of America expanding import restrictions and/or tariffs on other products.

Time will be required to ascertain whether or not the steel decision becomes a watershed event for world trade. However, it has awoken many to the possibility that a strong dollar is no longer guaranteed. If the dollar remains under pressure, money should begin to flow away from paper assets toward physical assets, such as metals, grains and world traded commodities.

Bill Gary
CIS, Inc.

The following editorial was published in Price Perceptions issue 1214 on March 16, 2002
Steel Tariff - Turning Point for Dollar ?

President Bush’s decision to impose tariffs on steel imports resulted in widespread anger among US trading partners. Many nations said they will file complaints with the WTO while others threatened immediate retaliation. Russia placed a ban on US poultry imports and the EC threatened restrictions on landing rights for US airlines. The US news media made only minor mention of the conflict while foreign reaction has been fierce with widespread condemnation.

Only a few weeks ago, Robert Zoellick, US Trade Representative, stated: “Tariffs are nothing more than taxes that hurt low and moderate income people.” Now, he must backtrack and attempt to reconcile the tariff with America’s trading partners. Business Week said: “It was a bold and seemingly contradictory move... A tax increase on imports from a President who promised that taxes would be raised only over his dead body... A protectionist move from a Republican who claims to believe in the free market... An inflationary action that can only hurt US exporters... A diplomatically risky gambit when America is trying to keep her allies in line with the war on terror.”

Interestingly, steel prices falling to the lowest level in 20 years has led to the first shot fired in a potential world trade war. Although many other commodities have been trading at 20 year lows for some time, they have been given little notice by US and foreign governments.

Are foreign nations dumping steel on world markets at prices below the cost of production? Are foreign producers of soybeans, wheat and other commodities also selling below cost of production? Or, is there another reason for price weakness that is less apparent and generally misunderstood?

In January, we published an editorial entitled Competitive Devaluations. It explained that foreign governments, suffering from the economic downturn, were devaluing their currencies in an effort to bolster exports and protect their economies. In the past two years alone, US trading partners have collectively devalued their currencies by an astounding 17% against the dollar. Therefore, foreign nations are not dumping steel on the US at prices below cost of production... They are not expanding soybean and wheat output to sell at prices below their cost to produce. They are competing in a way that US officials have chosen to ignore and/or hide. They are driving down US prices through strength in the dollar.

A lack of capital investment has been blamed for the US recession. However, why would anyone build a new factory in the US when they can build in a foreign nation and ship goods to the US at artificially low prices, encouraged by the strong dollar policy. Recently, President Bush spoke of the dangers of a too strong dollar. However, Treasury Secretary O’Neill called a press conference soon after and told reporters: “From now on, when you have a question about the economy or dollar, direct it to me... Because I am in charge of the economy, not the President.”

Willem Duisenberg, President of the European Central Bank, seemed to have a better understanding of the situation when he stated: “I am inclined to say this action by the US to protect the steel industry may have something to do with the exchange rate of the dollar.” However, Secretary O’Neill immediately denied there was any relationship between steel tariffs and the strong dollar. He said: “The strong dollar and need for tariffs are entirely different issues.”

It has been obvious to this writer for some time that dollar strength is the primary reason for low commodity prices - not lack of demand. The strong dollar has caused the US current account deficit to balloon to unbelievable proportions. Jim O’Neill, head of global economic research at Goldman Sachs, says that US net debt to foreign nations will reach $5.8 trillion by 2006. He calculates that the dollar would need to decline 43% for the US to cut the current account deficit in half.

The decision to place tariffs on steel is beginning to shift market focus toward the strong dollar. Although the Treasury Secretary continues to promote dollar strength, world investors and some economists are beginning to question that wisdom. The steel decision may indicate the US is becoming more concerned with its negative trade position than with maintaining a strong dollar.

Bill Gary
CIS, Inc.

The following editorial was published in Price Perceptions Technical Update issue 1214A on March 23, 2002
Dollar Index

More economists and analysts are realizing that dollar strength is a major hurdle for the US economy. Although the strong dollar holds inflation and interest rates down, it hurts US exports and discourages domestic industrial expansion. Following the announcement on steel tariffs, we expected political pressure to shift toward a weaker dollar. However, that has not happened and the Treasury Secretary continues to advocate a strong dollar.

Markets are the true reflection of political policy. When markets react adversely to policy, it normally sends a signal to politicians and policies are adjusted. However, there are times when politicians ignore and/or miss market signals. In those cases, markets are sometimes forced to extremes before enough attention is gained to correct policy.

Steel prices fell low enough, long enough, to signal politicians that something was wrong. However, the government imposed import tariffs rather than attack the real problem... dollar strength. If government continues to ignore stresses caused by dollar strength, many commodity markets may be forced to extremes before the real problem is recognized by politicians.

If dollar relief is not forthcoming soon, US commodity markets could take the initiative and plunge to levels that force politicians to revise strong dollar policies.

Bill Gary
CIS, Inc.

The following editorial was published in Price Perceptions Technical Update issue 1214B on March 30, 2002
Weak Dollar Unnecessary for Gold Advance !

The strong dollar has hurt many US industries that are dependent on exports. It makes US exports expensive to foreign buyers. It also makes imports cheaper to US buyers. In early March, the Administration moved to protect the steel industry by placing a 30% tariff on imports from selected countries. This week, they also moved to protect the lumber industry by placing a 29% tariff on imports from Canada.

For years, the US has been the world’s driving force behind free trade and markets. Why would the Administration risk a world trade war by placing unlawful WTO tariffs on steel and lumber? Why doesn’t the Administration understand it’s not foreign producers dumping products at prices below cost of production... It’s the overvalued dollar?

A private report, released this week, helps explain this contradictory course of events...

  • First: The President made the health of the US economy and its markets an issue in the War on Terror. In other words, if the economy or stock market should fail, it would mean victory for terrorists.

  • Second: A strong US dollar is essential to maintaining strong inflows of foreign capital. Foreign investment is necessary to fund growing fiscal and trade deficits.

  • Third: A weakened dollar would encourage foreign investors to sell US stocks and bonds, handing a psychological victory to terrorists.
Considering political implications, it becomes apparent the US chose to maintain a strong dollar at the risk of starting a trade war. With nations continuing to devalue against the dollar; growing instability in the Middle East; and spreading doubts about America's free trade commitment: investors are beginning to look at the safety of gold.

On Tuesday, CNBC, the widely followed investment network, featured gold and mining stocks for the first time in recent memory. They explained that gold and mining stocks have provided a much better return over the past six months than most equity markets. They ended the feature with the quote: Wall Street has begun to turn to gold as an investment.

In recent editorials, we have talked of a bull market in gold that would be propelled by dollar weakness. However, we are now convinced that gold will experience a bull market, with or without dollar weakness. If only a small fraction of investors move to the safety of gold, prices will advance strongly regardless of the dollar's value. A price advance toward $350 to $400 now appears reasonable in the long term.

Editor’s note: We believe gold prices could soar in months ahead regardless of the dollar’s value. However, as indicated in the last issue, domestic commodities such as grains, soybeans, and livestock may be required to plunge in value before politicians revise their strong dollar policies.

Bill Gary
CIS, Inc.

The following editorial was published in Price Perceptions issue 1215 on April 6, 2002
It’s the Dollar - Stupid !

This became a defining week for many commodity markets...

  • Packers paid $73 for cash cattle on Wednesday and April futures fell below $69 late in the week.

  • The USDA released the first wheat condition report of the season with the second worst ranking in modern history and futures fell 8 cents.

  • As the spring barbecue season approaches and meat demand peaks for the season, livestock futures collapsed.
Copper, coffee, cotton, corn, crude oil, gold, natural gas, silver, sugar, soybeans, and stock indices all closed lower for the week. What’s happening? Are we in a depression? Why isn’t government doing something?

The trade weighted dollar advanced from .8000 in 1995 to a recent high of 1.2000. Foreign steel makers that shipped $80 worth of steel to the US in 1995 now receive $120 for the same quantity. There fore, they can afford to cut prices by $20 or $30 and still show a profit. However, US steel makers are not able to share in the same windfall because they pay wages in dollars, not Brazilian real or Russian rubles. Therefore, cheap steel imports have ballooned in recent years, pressuring prices and forcing major US steel makers into bankruptcy.

Lumber worth $100 in 1995 now brings Canadian producers $119 due to devaluation of their currency. With the 19% advantage, Canadian producers have undercut US lumbermen and pushed them toward bankruptcy.

The Bush Administration recently placed import tariffs on steel and lumber in an effort to save these vital American industries. However, the strong dollar has led to record imports of beef from Australia, record hogs and pork imports from Canada, and made US wheat and soybeans too expensive for foreign buyers. Will the US move to protect the nation’s farmers and other industries from the ravages of foreign competition?

The Clinton Administration won the election in 1992 with the theme... It’s the Economy - Stupid! How long will it be before the current Administration realizes that foreign producers are not more efficient or cost effective than US producers... It’s the Dollar - Stupid!

Bill Gary
CIS, Inc.


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