Friday, October 22, 2010

Geithner Playing Chicken With His Creditors

If all the countries with trade surpluses, countries whose economies thrive on exports, [China, Russia, Germany and Saudi Arabia] , did as Timmy Geithner asks [G20 should refrain using FX for trade gains: Geithner ] the US Dollar would tank.

These countries sell their local currencies and buy US Dollars to keep the costs of their exports low and competitive in the world market. They use these Dollars to buy US Treasuries. In effect, by these actions in the currency market, they are propping up the US Dollar. "Today" this is bad for the US Economy. This is what has "for years" been behind the US' "strong Dollar policy".

Despite Timmy Geithner's blather about a "strong Dollar policy", the US needs a lower Dollar to be competitive again in world markets. Asia in particular is kicking our ass. The US also needs a lower Dollar to pay down its treasury debt.

U.S. Treasury Secretary Timothy Geithner, in a letter to finance leaders that was seen by Reuters, said "countries with persistent surpluses should undertake structural, fiscal and exchange rate policies to boost domestic sources of growth". - Oct 22 (Reuters)

What Geithner is trying to do is get the trade surplus economies to revalue their currencies higher, and force the Dollar lower. [Reverse the "strong Dollar Policy.] In this manner, Geithner can dodge the accusation that the US is debasing the Dollar on purpose by selling treasury debt to the Federal Reserve. [Quantitative Easing]

Nothing Geithner is asking the G20 to do regarding currencies is positive for the Dollar. It is extremely negative. The financial press have given Geithner a pass on this and instead focused on his, and the US' mantra, "strong Dollar" stance. In essence what Geithner is trying to do is force voluntary export restrictions on country's with trade surpluses. This was tried with Japan in the 1990s and had disastrous effects on the Yen. The Chinese are well aware of this ploy, and will strongly resist any attempts by the G20 to "manage" the global economy.

A strong Dollar at this juncture will kill the US economy, and the US equity markets. Need proof?;range=5d;compare=^gspc;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

Dollar up, equities down. Dollar down, equities up.

Geithner is doing "everything in his power" to get the Dollar to go down because the "markets" forced it down, and avoid being accused of debasing the Dollar...when in fact that is exactly what the US Government is doing. Perceptions.

But Timmy, heed this warning: You can't have your cake and eat it too. You can't promote a "strong Dollar policy", claim the Dollar will not crash "in our lifetime", while at the same time running around the world coercing emerging market economies to let the Dollar fall to give your debt ridden country cover as it debases the Dollar.

Geithner's "actions" this week should be propelling Gold higher at an accelerating rate. His wishes for World currencies is hugely Dollar negative. Yet for some reason Gold languishes and drifts lower. The Dollar is less than 2% above it's October 15 low of 76.14 since Geithner began preaching the country's "strong Dollar policy" line on Tuesday. Gold is off it's recent high of 1387 by 5.2%. This is laughable.

The absurdity of Gold's recent decline in "price" is that it is occurring in a market where "price" is determined by selling Gold that does not exist...The CRIMEX. Gold is in the midst of a powerful bull rally right here and now.. Much of the fuel in this rally that began in late July is coming from "short covering". What we are witnessing this week is a major bear trap being set up in the Gold market by the bears themselves.

When this recent decline in price reverses on the realization that Geithner's demands are purely Dollar negative, and disingenuous of the "strong Dollar policy", those foolish enough to short this powerful bull rally here will get squeezed into oblivion.

Gold drifted lower overnight more because of inaction in the Precious Metal markets than on any moves higher in the US Dollar. The Dollar was essentially flat overnight, still just 1.7% off of it's October 15 low of 76.14. The US is desperate to keep the Dollar decline from accelerating, while at the same time desperate to see the Dollar continue to decline. This is what makes this decline in Gold so frustrating, but positive all the same. Gold need a rest, and it's getting one. But it better catch it's breath fast because it will soon be off to the race to new highs soon.

Gold has now retraced almost 61% of it's breakout from $1265. Support in this regard rests at $1311. The Dollar has gained little traction here near it's recent low, and the Yen remains near 15 year highs versus the Dollar. It is interesting to note that the Chinese Yuan is DOWN strong this morning in the face of Geithner's demands that it move higher. As I said earlier, this smells like a bear trap. A move down to $1300 cannot be ruled out, but it would appear that a further move downward here may be limited, and risk for traders is to the upside.

Silver is probing support here near $22.90, a 38% retracement of the breakout from $19.80. Silver definitely needed a breather. It will, as always, shadow movements in Gold, but tightness in supply and strong demand should do much to support prices up here.

Bottom line: THIS IS A BUYING OPPORTUNITY. One we expected to see when we noted the Precious Metals markets were looking tired at the end of September. Investors, add to your positions, traders...good luck if your are short this market.

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