Dollar Dam About To Burst?

The U.S. dollar index saw significant losses as financial problems also refuse to go away and instead get even worse at firms like Lehman Brothers, Fannie and Freddie, and others. The false assumption of the past five weeks that drove the dollar higher was that the worst may have been behind us for the credit crisis and as more in the market re-realize that is not the case the greater trend of the long term bear market in the dollar resumes. Another round of poor economic data also reminded traders of just one of the many other fundamental reasons the dollar has been falling for some time and will likely continue to do so until that slew of problems is corrected, if possible.
-Chris Mullen, Gold-Seeker.com

You've heard it here before, "You can't polish a turd," and folks the shine is coming off this dung heap in a hurry. Precious Metals, Oil, all commodities responded accordingly...they rose fast and furiously. There were countless stories amidst the news babble today in an effort to "explain away" the surge in "everything tangible" today. Bottom line, it all boils down to supply and demand. To begin with, there is not enough Gold, and too many Dollars. Substitute any commodity for Gold in that previous sentence, and they all tell the same story, too damn many Dollars! The Dollar dam is bursting:

Fannie, Freddie Bailouts May Hinge on Debt Rollover
Aug. 20 (Bloomberg) -- Fannie Mae and Freddie Mac's success in repaying $223 billion of bonds due by the end of the quarter may determine whether they can avoid a federal bailout.

Rising borrowing costs and evidence that demand for their debt was waning last month led Treasury Secretary Henry Paulson to seek the authority to pump unlimited amounts of capital in Fannie and Freddie in an emergency. Freddie paid its highest yields on record in a debt sale yesterday amid concern that credit losses are depleting the capital of the beleaguered mortgage-finance companies.

Rolling over the debt ``is the single most important factor to their ability to remain liquid,'' said Moshe Orenbuch, an analyst at Credit Suisse in New York. ``So far, they've been able to do that.''

Investors in Asia, the biggest foreign owner of Fannie's $3 trillion of bonds, are reducing their share of purchases, potentially increasing the need for Paulson to make good on his pledge to backstop the companies.

``This whole backstop mechanism was set up so the actual need for it could be avoided,'' said Mahesh Swaminathan, a mortgage strategist for Credit Suisse in New York. ``The market is testing the Treasury's resolve.''
http://www.bloomberg.com/apps/news?pid=20601087&sid=aztDmUimj.dM&refer=home

Paulson likely to reach for GSE "bazooka"
WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson last month described a proposed federal backstop authority for Fannie Mae and Freddie Mac as a "bazooka" whose mere presence would silence market unrest over the viability of the two mortgage finance giants.
But just weeks after receiving the new weapon from Congress, the Treasury looks increasingly likely to have to use it, at a cost of billions of dollars to taxpayers.

A deepening American housing slump, mounting mortgage losses, and rising borrowing costs are conspiring to shatter confidence in Fannie and Freddie especially among their shareholders, who fear a de-facto government takeover will wipe them out. Shares of the two government-sponsored enterprises plunged to their lowest levels in 18 years on Wednesday.

"I think the number of options are dwindling every day that we see declines in the stocks. It has become virtually inevitable that the government has to nationalize Fannie and Freddie," said Kevin Cronin, chief investment officer at Boston-based Putnam Investments.
http://www.reuters.com/article/newsOne/idUSN2065129520080820?pageNumber=1&virtualBrandChannel=0

Confidence in GSEs is fading rapidly
Overview: Fannie Mae and Freddie Mac are struggling as investor confidence in the two Government Sponsored Enterprises (GSEs) is fading rapidly. The share prices of Fannie Mae and Freddie Mac were down more than 20% on Monday after an article in Barrons questioned the two GSEs' ability to raise the necessary capital, and the risk of a Treasury Department takeover. Yesterday, investor concerns over a government bailout heightened anew and Fannie Mae's share price dropped 27% while Freddie Mac was down 22%. While the risk of GSE shareholders losing their money is of course serious, the rise in agencybacked mortgage bond yields is, in our view, more worrying and risks prolonging the downturn in the US housing market.
http://www.fxstreet.com/fundamental/economic-indicators/us-confidence-in-gses-is-fading-rapidly/2008-08-21.html

And so, just a couple weeks after assuring Congress, and the American Taxpayer, that the blank check Congress gave the Treasury as a "backstop" for Fannie and Freddie would most likely never be used, the markets are now pounding the table, and calling Hanky Panky Paulson's bluff. The Dollars that will have to be printed to "blow up" Fannie and Freddie with Pinocchio Paulson's "bazooka" will be mind boggling. This is NOT good news for the buck. Can you say "elevator, going down"?

For the record ...
by Larry Edelson
Gold continued to drop earlier this week, breaking below $800 an ounce, falling to as low as $780. How much lower will it go? Does the decline mean the bull market in gold is over? What significance does gold's decline have for inflation, the dollar, and the natural resource markets?
These are all questions on investors' minds right now, and I'll answer them for you.

First, let me state emphatically, and for the record — gold's bull market is NOT over. No way, no how.

Second, crude oil's bull market is NOT over.

Third, the natural resource bull market is NOT over.

Fourth, inflation has NOT peaked.

Fifth, the financial crisis affecting the U.S. economy is far from over.

And last but not least, no way is the dollar's bear market over.

I sound pretty confident, right? Now I'll explain why. Let's start with the main force at work ...

The Fundamentals Underlying the Dollar's Bear Market Have Not Changed One Iota

The Fundamentals Underlying the Long-TermBull Market in Gold Have Not Changed Either
http://www.moneyandmarkets.com/Issues.aspx?For-the-record-2112

Leading economic indicators fell sharply in July
NEW YORK (AP) -- A private business group's measure of the economy's health showed the largest drop in one year as stocks fell, new building permits declined and unemployment rose.

The New York-based Conference Board's said Thursday its monthly forecast of future economic activity fell 0.7 percent in July, far more than the consensus estimate of a 0.2 percent decline by Wall Street economists surveyed by Thomson/IFR.

The last time the index showed a drop this great was last August, when it fell by 1 percent.
Revised June data showed no change to the index, which has slipped 0.9 percent for the six months ending in July.

The decline was the steepest in the index this year. The largest drag on the index was the decline in building permits, followed in order by stock prices, rising unemployment claims, a tightened money supply and falling manufacturers' orders for consumer goods.

Interest rate spreads, consumer expectations and manufacturers' orders for capital goods all contributed to the index.
http://biz.yahoo.com/ap/080821/economic_indicators.html

What a strange coincidence. The last time the Leading Economic Indicators Index showed a drop this great was last August. And we ALL remember last August. Gold and Silver bottomed last August, almost one year ago to the day. They then rose, and rose substantially. They didn't stop rising until the Bear Stearns bailout on March 17, 2008. Between the August 15, 2007 low and the March 17, 2008 high, Gold rose 61% and Silver rose 92%. Will recent history repeat itself this Fall and Winter? Time will tell. The field has been plowed, the fundamental seeds to higher Precious Metal prices have been sowed, and soon it will be raining Dollars. I've got goosebumps...

Gold and Silver launched off their recent lows today as the Dollar was taken to the woodshed, and investors finally woke up to the disconnect between prices for Precious Metals and their lack of physical supply. The paper markets for Gold and Silver have been revealed for the shams that they are. They must be destroyed.

Silver hurtled two levels of short term resistance today at 13.36 and 13.70. They now serve as support. Short term resistance in Silver tops out at 14.04. Should Silver challenge resistance at 14.04, traders with new positions in the low/mid 12s should look to protect profits. A strong breach of 14.04 opens up Silver for a clear run to 15.

Gold has been strong all week, and launched off support at 812 this morning, and at this hour is challenging short term resistance at 836. Traders with positions in the 790s- low 800s should be protecting profits here. Major resistance at 855 looms close overhead. Gold must clear 855 with authority to establish a near term bottom here for Gold at 772. A dip to 818/12 cannot be ruled out here, and should be bought should it occur.