Monday, June 18, 2007

US Dollar Bulls Up The Creek Without A Paddle

US Dollar Bulls got a wake up call on Friday following the latest Treasury International Capital report. The "headline" numbers were positive, and coupled with the CPI numbers should have kept a bit of a breeze in the Dollars sails. But inside the report we find numbers that not only spell doom for the Dollar, but a catalyst for falling US Treasury bond prices and rising interest rates. (Barcelona) – Net buying of long term U.S. securities have reached an amount of $84.1 billion in April according to the latest report by the Treasury International Capital report, known as TIC.

Net foreign acquisition of long term securities was $76.5 billion in April up from $39.9 billion in March. Foreign buyers continued purchasing corporate bonds and U.S. equities, but treasury notes and bonds fell to $376.0 million in April, down from $30.5 billion in March.

The monthly tic flows, which includes non-market flows, short-term securities and changes in banks' dollar holdings increased to $111.8 billion in April, up from $30.1 billion the previous month.

Virtually NOBODY was buying US Treasury notes in April. China actually decreased their US Treasury holdings to $414 billion from $419.8 billion last month.

The Current Account data was also released Friday morning by the Commerce Department. It showed a deficit of -$192.58 billion for Q1 2007 which was the equivalent of 5.7% of GDP for that quarter. That was in comparison to -$187.94 billion for Q4 2006 which was 5.6% of GDP. The current account deficit continues to grow, and that is not good news for US Brand toilet paper either.

Peter Schiff, Euro Pacific Capital, Inc. sheds some light on the cause and effect of a lack of buyers for US Treasury IOUs:

At a commercial real estate conference earlier this week, Alan Greenspan downplayed concerns that the Chinese might sell their significant holdings of U.S. Treasuries. The former Fed chairman based his opinion not on the inherent investment merits of Treasuries, but rather on their lack of them. His confidence stems simply from his belief that the Chinese have no one to whom they can sell. Furthermore, Greenspan sees this as a problem for the Chinese and not the U.S.

Although the performance of U.S. Treasuries has long been regarded as poor vis-à-vis other classes of sovereign debt, its overriding virtue has always been its supposed unrivalled "liquidity." As the most heavily traded asset in the world, it is argued that massive investors like the Chinese have few other markets in which they can operate. However, if there are no significant buyers to whom the Chinese can sell, then there is no real liquidity at all. If there is no performance or liquidity, why would they continue buying?

True to form, Greenspan is completely wrong. The Chinese are not the ones who are stuck, Americans are. In order to exit their positions in U.S. Treasuries, the Chinese do not have to sell, they only need to stop buying and let their existing bonds mature. Then the U.S. government, not the Chinese, will be the ones forced to find new buyers for its debt.

Most of the debt that the Chinese own is short-term. Therefore all the Chinese need to do is simply not re-purchase new Treasuries when the U.S. pays them for their existing notes. Perhaps Greenspan should rent a copy of the 1981 Kris Kristofferson movie “Rollover,” where the fear that Arab countries would not rollover maturing treasuries sent gold prices soaring.

Dollar negative, Gold positive. The US Dollar's days are numbered, and Gold's days are infinite.

To really get a grasp of the "China Factor" as it relates to the demise of the Dollar please read the latest from John Mauldin, Millennium Wave Advisors:

Be Careful What You Wish For

The sum of all fears The Fed and The Treasury Department harbor for the Dollar may be beginning to unfold right now before our very eyes. Core Inflation numbers aren't going to fool the American Public much longer. Gold is about to become a very hot commodity as investment demand across the globe continues to grow as containment of an impending US Dollar crisis begins to unravel.


On Friday Gold and Silver came very close to breaking their shackles at 655 and 13.26 respectively and confirming recent lows as interim bottoms. With renewed Dollar weakness ignited Friday and a lack of potent economic data this week, the potential for both Gold and Silver to make some positive progress towards technical repair on their charts is high. And let's not ignore the price of Oil, it closed over 68 on Friday. This could be a good week to kick a few of dem Rat Bastids asses.

Adam Hamilton, Zeal Intelligence LLC said it best in his weekly post:

Gold is in a full-blown upleg! Since its latest major interim lows in October, it has already risen 23% at best in April and was still up 15% even at its lows this past week. Over these same periods of time respectively, the flagship S&P 500 stock index was only up 9% and 12%. Thus gold has handily beaten even the benchmark stock-market performance!

Is this bearish? Is gold outperforming a widely-respected stock-market rally a bad thing? You’d certainly think so when listening to gold-stock traders lament gold’s performance of late. Yet all the Ancient Metal of Kings has done is make an orderly retreat within its uptrend from upper resistance to lower support over the last couple months. This is totally normal behavior as all uplegs flow and ebb, taking two steps forward then one step back to rebalance sentiment.

Silver Resistance: 13.26 / 13.39 / 13.50

Silver Support: 13.16 / 13.08 / 13.03
__________________________________________All prices SPOT

Gold Resistance: 655 / 658 / 662

Gold Support: 652 / 648 / 643

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