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The Floating Exchange Rate System

Currencies / Fiat Currency Aug 24, 2011 - 05:01 AM GMT

By: George_Maniere


Best Financial Markets Analysis Article           In 1953, renowned economist Milton Freidman was the first man to propose the “floating exchange rate system.” In 1971 it became a reality as then President Nixon was trying to open trade with China. Friedman saw the floating exchange rate system as a way to even the playing field for the fortunes of every nation. Sadly, I see that the bigger governments have tried to obfuscate the free market trade as they want the whole pie for themselves.

           The money of the wealthy can find safe havens in times of uncertainty or they can simply hoard their wealth and refuse to invest it. Sadly the middle class worker does not have the resources to hoard his savings or find a safe haven overseas. These are entitlements of the rich alone. I do not wish to single out the rich as it is our government that has taken the approach of trying to create class warfare to cover their dismal and less than coherent policies. This ruse that the government has been trying to create is a class ware fare not worthy of such a great nation.       

           We live in a global village. Money or capital avoids political changes and taxes just as it is attracted to prosperity and opportunity. The people who fled repression and immigrated to the United States did so for the reasons of religious freedom and a chance at a prosperous future. Sadly, the Statue of Liberty has been sacrificed on the altar of greed and avarice.

           About a month ago I did a seminar at a local community college giving a class about the basics of technical analysis. I began the class by asking the several hundred students that chose to attend how many had read the great novel 1984? I think about 10 hands went up. I then asked how many of you have heard of George Orwell.  The same 10 hands went up. When I look around at the world I see what was once fiction has now become the rules on which our society functions with corruption, manipulation and dishonesty hinging on the presumption of guilt. We claim illegal aliens are criminals and demonize them of not paying their fair share. I seem to remember reading the Constitution which if I am correct was built on the premise of no direct taxation. Well the wisdom of our government has rejected the teachings of Benjamin Franklin, Thomas Jefferson, James Madison and all of the founding Fathers. Instead their wisdom and foresight have been replaced by the wisdom of Karl Marx and the introduction of the Income Tax which requires the government to know everything you do or earn. The monuments that adorn Washington, DC are nothing but symbols of days long since passed.

           Please forgive my political posturing. You who read me know that I don’t usually use this forum as a bully pulpit for espousing political views but the case that I am trying to make was that Milton Friedman’s economic model of the floating exchange rate system opens up venues for trade and the open exchange of trade between all nations’ stops wars. S top wars and we’ll figure out the rest. I will end this part of my epistle with a comment on how sad it is that our government still hasn’t gotten that message. They’re too busy looking for someone to make a culprit. I think anyone elected to office from now on should receive a copy of the Constitution and a copy of 1984.

           OK, I’m done. Now I’ll go back to what this letter is really about and that is to help you preserve the capital you have and while we’re at it make some money.

Yesterday, Gold finally began its correction. It closed the day down $56.00 to close at 1836.00. Silver closed down $1.67 down $42.29. While I see gold’s correction as healthy and expected silver’s correction was simply a reaction to gold. I don’t think we will see gold continue to move down another $250.00 which would be what the charts tell me would be a proper correction. We must remember that silver has broken its level of resistance and I see silver continuing its running up once it separates itself from the gold trade.   

In the meantime, stocks surged as another bleak dose of economic data raised hopes that the Federal Reserve will take additional measures to stimulate the economy.

The Dow Jones Industrial Average rose 322.11 points, or 3%, to close at 11176.76. The Standard & Poor's 500-stock index rose 38.53 points, or 3.4%, to 1162.35, as energy, technology and consumer discretionary stocks registered the strongest gains as all 10 of the S&P 500's sectors finished in positive territory. The technology-oriented Nasdaq Composite rallied 100.68 points, or 4.3%, to 2446.06.

Another round of dismal economic reports prompted hopes that Federal Reserve Chairman Ben Bernanke will employ more accommodative measures to boost the economy. The Richmond Fed's regional manufacturing survey showed sharply declining economic activity this month. New home sales also dropped for a third straight month and fell to the lowest level since February.

The downbeat reports have put more of an emphasis on Mr. Bernanke's scheduled speech in Jackson Hole, Wyo., on Friday. Investors hope Mr. Bernanke will be more open to new easing measures, but at the same time are unclear as to what the central bank may have in store.

While many feel that Dr. Bernanke will pull a rabbit out of his hat as he did last summer, I’m afraid there will be many disappointed investors listening to him on Friday. My concern is the Fed wants to be careful that they're not directly reacting to the stock market. Many analysts say the Fed doesn't have as much political support to announce a third full-fledged bond-buying program, commonly known as quantitative easing, or QE3. I'm more concerned that if they put a QE3 in place, what if the market yawns? Then what?

The market's recent gains come after a volatile few weeks of trading that have put major indexes in correction territory. The spreading European debt crisis and the threat of the U.S. economy double-dipping back into recession have been the main factors weighing on investor minds.

I conclude that people are maybe thinking there was a rush to judgment on the odds of a double-dip recession. I think investors are finally coming in, doing some bargain hunting and finding stocks are a very enticing alternative to what's being offered in fixed income markets.

In conclusion, while I don’t think it will happen if gold pulls back to the level of $160.00 - $1650.00 this will be the last chance you will have to buy gold at discounted prices for a good long while.

I am long GLD, PHYS, IGL, IAU, SLV, PSLV and AGQ.

By George Maniere

In 2004, after retiring from a very successful building career, I became determined to learn all I could about the stock market. In 2009, I knew the market was seriously oversold and committed a serious amount of capital to the market. Needless to say things went quite nicely but I always remebered 2 important things. Hubris equals failure and the market can remain illogical longer than you can remain solvent. Please post all comments and questions. Please feel free to email me at I will respond.

© 2011 Copyright George Maniere - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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