Yesterday we looked at the "possible" cause(s) for the sudden rise in the US Dollar. Falling Oil prices, the trashing of the Euro and the Yen.
Falling Oil do not cause the Dollar to rise. A rising Dollar causes Oil to fall. In this respect it would be in the Fed's interest to see the Dollar rise, and Oil prices fall. After all, they have promised for months that energy prices would moderate "in the second half". They had to make good on their prediction somehow.
A falling Euro and Yen in the face of a rising Dollar would certainly pressure Gold prices. It would then be in the Fed's interest to see the Dollar rise. Gold is Enemy #1 at the Fed. Gold is the Truthsayer, and the Fed will stop at nothing to stifle the truth about inflation.
But wouldn't a falling Euro and Yen make energy more expensive in Europe and Japan, and increase the rate of inflation in their regions? Yes, it would. It is unlikely then that Europe and Japan would be buying the Dollar in amounts that would intervene in the Dollars decline.
The Fed's desperation has reached new heights if they have been forced to unilaterally defend the Dollar through currency intervention. I would suggest then that the systemic financial crisis this nation is now facing is far worse than ANYBODY could ever imagine.
The most damaging result of this Fed intervention in the currency markets to prop up the Dollar has been the wholesale markdown of Gold and Silver in an environment where they should be soaring higher. Billions of Dollars of Gold were effectively stolen by the Fed's cronies at the CRIMEX over the past week. They know the jig is up, and they know that Gold is the place to be when the financial house of cards is flattened in the weeks ahead.
As painful as the markdown in Precious Metals has been for Gold and Silver speculators the past week, the profit potential that awaits those able to buy at these fire sale prices is HUGE. Never look a gift horse in the mouth.
Well, we’ve all heard the adage “buy when there is blood in the streets.” How about another one, “buy when you are ready to puke!”
And NOW is the time to buying, along with plans to buy more as prices begin to rise again. The charts posted above tell the story better than words can here.
Mystery Solved
by James Turk
On July 15th the US Dollar Index closed at 71.87, the lowest close since reaching its record low in April. This index was in the process of breaking down, and in fact it had actually fallen out of its uptrend channel...
However, rather than continue lower and fall off the edge of the cliff, the Dollar Index suddenly and mysteriously reversed course. What caused this index to suddenly pull back from the brink and then reverse course to shoot higher over the past three weeks?
The Federal Reserve did not suddenly contract the amount of dollars in circulation.
The Federal Reserve did not raise interest rates during this period. Consequently, inflation adjusted interest rates remain negative.
There has not been any news exceptionally favorable to the dollar. In fact, the banking problems in the United States continue to mount, while the federal government's deficit continues to soar out of control.
So what happened to cause the dollar to rally over the past three weeks? In a word, intervention. Central banks have propped up the dollar, and here's the proof.
The Anatomy of Foreign Exchange Intervention
Author: Jim Sinclair
We have just witnessed the first massive act of intervention coming off the .7199 USDX and $1.5974 Euro. We have covered why this happened and its meaning in terms of the installment of currency parities, albeit this time on a floating basis.
Now you need to understand how intervention works when repeated over time:
1. Currency intervention is like being addicted to a controlled substance. Your first experience at the height of the controlled substance produces mind-altering feelings and emotions. From this point forward you require more and more of the controlled substance to reach anything near the first experience. When you fail to get the fix, the pain and/or downer is unbearable.
2. Each subsequent experience of foreign exchange intervention demands more vocalizing and funds. That being said, you have just seen the most success you will see in the Euro via intervention - and thence gold
3. Eventually it becomes much too expensive to sell a more valuable and appreciating currency in return for fundamentally weak and therefore depreciating dollars.
4. The operation loses capital input because it is the reverse of what central banks in the East wish to be a part of.
5. The operation runs out of capital as one central bank after another uses intervention to covertly unload US treasury instruments into demand.
6. The operation runs out of power as the market senses a wounded strategy. The seven trillion dollar a day turnover in the world dollar market now fades it. That means taking the opposite position to the desired impact of the intervention earlier and earlier in the process.
7. Eventually the operation moves to 75% verbal intervention and 25% capital-driven intervention.
8. As the price of the fade comes in closer, the power of the strategy weakens. The USD troops will move up in price as a secondary line of defense for the ongoing operation.
9. Eventually the strategy fails at that level. This is why you have heard many times that intervention in foreign exchange markets always fails. Intervention in foreign exchange markets never has nor ever will change the trend in any currency.
Intervention can only have legs when it floats the temporary parities in the direction of the major market trend. Understand this and you will understand why and how much of an influence the strategy will produce. When the vocal instruments get louder, the reactions become smaller until the strategy at that level of floating parity is checkmated by the world marketplace.
Currency Intervention Won’t Halt the U.S. Dollar’s Nosedive
By Peter D. Schiff
Some observers claim that now is the time for a coordinated central bank intervention to reverse the dollar’s decline. Those who place their faith in such a plan overlook the fact that Asian and Middle East central banks have been unsuccessfully intervening on the dollar’s behalf for years. Nations that maintain dollar pegs must constantly intervene in the foreign exchange markets by buying dollars to keep their own currencies from rising in value. Over the past few years the scope of this intervention has been unprecedented, with foreign central banks accumulating trillions of excess dollar reserves. Yet despite these misguided, Herculean efforts, the dollar has fallen drastically.
Help From Across the Pond?
Intervention advocates must believe that if the European Central Bank (ECB) and a few other central banks joined the fray, that a better outcome would be achieved. However, any additional efforts to artificially prop up the ailing dollar will be equally ineffective.
Even if ECB intervention could slow the dollar’s descent, what possible reason would the Fed’s European counterpart have for doing so? The ECB is already concerned about inflation and is preparing to raise rates as a result. Intervention to support the dollar would only worsen Europe’s inflation problem and run counter to these efforts. To buy dollars, the ECB must increase its own money supply. That is exactly what is happening in countries like China and Saudi Arabia, which is why inflation in those nations is already much higher than it is in Europe.
Further, since the ECB is asking Europeans to endure higher interest rates to fight inflation in their own backyard, why should Europe’s citizens have to make additional sacrifices to help Americans fight inflation in the U.S. market? Indeed, that would be an especially tough sell given that the U.S. central bank has held this economy’s benchmark interest rate at the ridiculously low level of 2%, and has effectively excused Americans from the conflict.
Since we can’t count on any help from our friends, the only option would be for the U.S. Treasury to intervene unilaterally. However, the U.S. government should think twice about bringing a knife to a gunfight. The Treasury only has about $75 billion in foreign currency reserves with which to intervene. That “war chest” would make about as much difference as adding a raindrop to the Atlantic Ocean.
To put that U.S. currency-reserves figure in some perspective, consider that Poland has $77 billion, Turkey has $78 billion, and Libya has $79 billion. On the other end of the spectrum, China has $1.7 trillion (not counting Hong Kong’s own $150 billion), Japan has $1 trillion, and Russia has $550 billion. India and Taiwan each have about $300 billion. Singapore, a nation with fewer than 5 million people, has $175 billion.
In fact, the United States holds just about 1% of the world’s $7.6 trillion of foreign currency reserves, and our total position amounts to just 2.5% of the total daily volume of foreign exchange trading. Talk about Bambi vs. Godzilla!
Here’s the bottom line: If the U.S. dollar is going to fall, the U.S. Treasury is completely powerless to do anything to stop it.
How Unusual Is a Bear Market in Oil?
A story in USA Today yesterday began "Finally, investors have a bear to get excited about. Oil now is in unofficial bear market territory, with the price of a barrel of crude falling to $115.20, down 21% from its July 3 peak."
A good question to have asked prior to writing an article such as this, something that apparently doesn't occur to the new "oil bear market" enthusiasts, is whether a 20 percent decline in the price of crude oil is unusual or statistically significant in any way.
It doesn't take too much work to realize they happen just about every year.
Oil rises to near $117 on falling inventories
SINGAPORE (AP) -- Oil prices rose for a second day Thursday in Asia, approaching $117 a barrel after U.S. gasoline supplies fell more than expected in a weekly government report.
In its weekly inventory report, the U.S. Energy Department's Energy Information Administration said gasoline supplies fell by 6.4 million barrels for the week ended Aug. 8, nearly three times more than the 2.2 million barrel drop expected by analysts surveyed by energy research firm Platts.
The EIA said crude stockpiles fell 400,000 barrels last week against analyst expectations of a 500,000 barrel increase. Inventories of distillate fuel, which include diesel and heating oil, decreased by 1.7 million barrels; analysts had expected distillate stocks to rise by 1.9 million barrels.
Mixing the picture, though, the EIA also said demand for gasoline over the four weeks ended Aug. 8 was almost 2 percent lower than a year earlier, averaging 9.4 million barrels a day.
But Gavin Wendt, who expects oil prices to test $150 a barrel by the end of this year, said U.S. investors have overestimated the impact a slowdown in the U.S. economy will have on global demand for crude.
"They still think the U.S. is the epicenter of the world economy," Wendt said. "The U.S. is still very important, but as far as commodity demand is concerned, the U.S. isn't the main game in town. China is the biggest consumer, and increasingly India."
Gavin, you are a genius! The US is NOT the epicenter of the world economy. And it is about time Americans wake up to this fact.
I found it amusing today that several Oil analysts suggested that refiners are cutting back on production because of decreased demand, and that it is these production cuts that have caused this huge drop in gasoline inventories. I must point out though that if this were indeed the case, Oil inventories would be up substantially because the Oil was not being refined. Yet Oil inventories were down last week. The numbers don't add up to support the conclusion that refiners have cut back production. They do support the fact that the "story" about "demand destruction" in a slowing economy is just a story to give the perception that demand is falling.
Gasoline prices have dropped over 30 cents a gallon over the past 30 days. I bet with the price of gas on sale, demand for gasoline has risen. This increased demand "while the sale lasts" has had an unrecognized effect on gasoline inventories. Any refiner cut backs are seasonal, as the Summer driving season is winding down. The end of the summer driving season probably has more to do with "demand" right now than price does.
The alarming number in this weeks Oil inventory report is the drop in heating Oil. Refiners will be switching shortly back to heating Oil production to build supplies for this fall and winter. This happens EVERY year about this time. The further heating oil supplies fall behind heading into the heating season, the more likely Oil prices will rise going forward from here.
In a nutshell: The Oil Bubble has not burst. There is no Oil bubble.
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