By Kenneth Coleman, editor
Investment Tracker

       There are a number of myths that were created during the past market mania - buy and hold, a strong dollar is always good for the nation, job loss always weakens the economy, the world will always do business in dollars, and gold is an archaic metal that no longer has ties to the value of money.

       The mantra for middle class investors was buy and hold, buy and hold. In the beginning, the mutual funds had telephone switching so that mutual fund investors could easily move in and out of these funds.
       Eventually, the mutual funds quietly forced a de facto buy and "mold" strategy by making it too expensive and difficult to move out of harm's way when a fund's price began to fall. Forcing mutual fund holders to stay put kept the sell-off of stocks in declining sectors from mushrooming. It also helped to improve a fund's bottom line by having more buyers and holders than sellers.
       Realizing they had a captive audience bred contempt in the integrity of many fund managers. It was just a matter of time before mutual fund managers took advantage of the system that sets its price once daily to indulge in arbitraging.
       It was just another example of how slack regulation, over a period of time, eventually leads to a breakdown in the regulatory arm of the markets and to unethical and illegal practices.

       This is only true if the dollar and the other currencies with which it trades is tied to a gold monetary system .The last gold system died in 1971. Since that time, the dollar and the world's other currencies have floated in value. Nations vie for undue trade advantage by keeping their currency's value too low or by allowing the world's trading currency - the dollar - to be valued too high. In essence, a strong currency is a sign of weakness rather than strength.
       In a fiat monetary world and in a global economic trading arrangement, the weaker currency countries can dominate. The strategy was once referred to as "beggar they neighbor."
       After 1971, when the dollar's value was no longer pegged to gold, the U.S. stupidly assumed the vast majority of nations would continue to hold dollars rather than to opt for gold. After World War II, many nations did not officially join the gold monetary system established in 1944 until the late 1950s.
       That gold monetary system would have died much sooner than 1971 had our government not decided to pay out two-thirds of our gold holdings in order to tempt countries that held dollars to continue holding those devaluing dollars.
       Today we have a floating exchange fiat monetary system. There are two reserve currencies - the U.S. dollar and the Euro. This system calls for fiat money holders to value government debt more dearly than they value gold. The central banks of the U.S. and Eurolands hope that people with wealth will hold that wealth mainly in one of the reserve currencies - instead of gold.
       It's too soon to say if this fait money system will last. Never in modern history has a fiat monetary system lasted more than four decades.
       Within the next 20 years, China will be forced to become a third member of this monetary system, by operating a third reserve currency.
       Between 1997 and 2001, the dollar's value had been pushed higher by nations delighted to invest in U.S. markets and our government's monetary policy. Foreign investors had an advantage over domestic investors of about 10% because of the revaluing dollar.
       Our dollar has been kept artificially high for too long. Our trade deficit has soared to all-time highs, and too many jobs have been permanently transferred overseas where production and labor costs are much cheaper.
       Although the dollar is now dropping the consensus of non-government monetary analysts is that the dollar is still overvalued by as much as 30%. If our government continues to keep the dollar to valued, our standard of living will continue to erode.
       There has been much talk about what is now referred to as the "Wal-Mart come from China.
       However, Wal-Mart is simply a surrogate of the system, taking advantage of the fact that it can buy and sell China's products cheaper than the products of other countries. China has tied its currency to the value of the dollar and can take advantage of the "beggar thy neighbor" option in the fiat monetary system.

       In the world of fiat money, job loss due to an overvalued trading currency relative to the value of its trading partners, forces corporations to move abroad in order to compete. If the corporations profit, this is a positive, not a negative. It is corporate profits that delight the stock market, not jobs.
       Jobs don't necessarily equal greater productivity or increased profits. Cheap labor costs and an undervalued currency often do equal increased profits. That is the cruel reality the fiat monetary system has created.

       If you have been reading this article, you probably know the reason this statement is a myth. In a fiat monetary world, it's not a nation's wealth alone that makes its currency valuable. In a fiat monetary world, currencies become nothing more than commodities, trading like pork bellies and frozen orange juice. Supply and demand become the determining factor of value.
       During the Vietnam War, our country created more dollars than there was demand. The excess money supply drove the price of gold higher, eventually destroying the value of the dollar. This drove more investors out of dollars.
       Today, there has been another U.S. dollar supply and demand problem. As the U.S. has been forced to devalue the dollar, increasing numbers of dollar users are turning to other currencies such as the Euro, Swiss franc and gold.
       As fewer governments and investors are willing to buy our debt, the Fed will soon be forced to raise interest rates in order to lure investors back in to our notes and bonds.
       The Fed has decided to leave rates alone and pledged to keep them at the 1% level for a "considerable period." It should be obvious the Fed is committed to keeping the economy growing for as long as conditions allow (translation: the dollar will continue to decline and debt will continue to rise).
       If I were on the Fed board, I would realize that rising interest rates would destroy the emerging boom market and its economy. I would opt for a serious market correction that would scare the hell out of the "weak hands" investors, but would provide a buying opportunity for savvy investors.
       What else besides rising interest rates could cause a significant stock market correction? A slow down in the money supply into the economy. The broad money supply (MZM) has been slowly moving lower since July. If this trend continues, it would first bring down smallcaps and gold/silver mining shares, and then eventually topple the big caps as well.
       The media will seize on a news opportunity to make any correction seem worse than it is. I feel the Fed and our government have spent too much time, energy and resources to keep this economy growing and will not allow it to die easily.
       If the Fed's strategy proves correct, any market correction will be a buying opportunity to buy the right stocks on price dips. It will also be an opportunity to see what the big block buyers accumulated from panic-stricken weak-hand investors. My guess is that gold and gold mining shares are going to top the list.
       FOMC Chairman Alan Greenspan has taken much of the recent pressure off the Chinese to float their currency against world currencies and unpeg it from the dollar.
       Greenspan stated that if the Chinese did allow the value of their currency to float and the Chinese yuan rose in value, it might cut China's exports. But he said rather than boosting production of textiles in the U.S., it was "far more likely" that U.S. imports from other low-wage countries in Asia would simply replace the Chinese textiles.
       What I hear Greenspan saying is our government has no intention of forcing the Chinese to increase the value of yuan-remninbi to what many experts believe should be an increase of as much as 40%.
       This leaves to other options: (1) Continue to allow the Chinese an incredibly unfair trade advantage in the U.S.; or (2) Allow the dollar to move to such a low level that the Chinese will be forced to unpeg its yuan in order to salvage the dollar wealth China has gained over the past decade.
       China has accumulated a massive amount of our debt in payment for its products in recent years. If the dollar continues its decline, the value of China's dollar holdings will also decline. This is a more subtle way of forcing the nation that is beggaring they neighbor into a more favorable trading situation. It is certainly more favorable than attempting to engage in a trade war.
       In the past 200 years every major long-term business cycle (lasting between 40 to 60 years) has ended with an escalating trade war.
       New technology has jump-started every long cycle for the past 200 years. After 20 to 30 years, demand slows and global production soars. Many nations are forced to cheat in doing business with their trading partners to keep from falling into recession.
       In the past, when this point in the long cycle has come to fruition, it has led to an escalating trade war that has always ended in the real thing.
       This time the current long cycle is supposed to end differently. Countries are expected to solve trade problems by allowing currencies to float and let their values adjust to supply and demand.
       However, there may be a speed bump ahead. Increased corporate and individual bankruptcies are taking a toll on the MZM (money to zero maturity) money supply. Since July, MZM money supply, on a quarterly basis, is down 40%.
       The Nasdaq is particularly in tune with the flow of money into and out of the economy. Unless there is a reversal of decreasing money supply, the Nasdaq could move much lower. This drying up of MZM money supply liquidity would buoy dollar value and cause gold and silver to move lower.

       After our nation came off the gold standard in 1971, our government made an agreement with OPEC to allow it to tie its crude oil cost to the value of gold. This was the real basis for the G7 nations' War on Gold for the last 30 years.
       OPEC recently grew tired of G7 nations managing its profits by forcing gold's price to remain well below a free market level. OPEC opted to move to the Euro for its crude export payments. The Russian government has suggested it will follow suit if the dollar keeps falling.
       That is another reason our government, in league with the other major industrial nations, is still selling gold reserves into a bullish gold market. Our central bank, the Fed, as well as the other major central banks, are determined to keep gold's value as far below free market value as possible.
       Many nations are still holding gold reserves and are buying bargain basement priced gold after every G7 nations' gold sale. To even suggest that gold has no place in helping to determine the value of currencies is laughable.
       The day governments give up all attempts at controlling the upward moves of gold's price will be the day we should check to see if nations and wealthy individuals are still accumulating it. Don't hold your breath on that. Governments have manipulated the price of gold for centuries.
       The Gold Money Flow Index is at its most bullish level since the mid 1970s. If not for government manipulation, gold's price today would probably be nearing $500 an ounce. The manipulation makes it difficult to predict gold's price movement, but experts estimate gold is undervalued by at least 25% to 35%.
        Editor's Note: Kenneth Coleman is editor of the Investment Tracker, 4805 Courageous Lane, Carlsbad, CA 92008, 1 year, 12 issues, $139. Visit the Web site at www.theinvestmenttracker.com.