Used to be strong dollar means weak gold, but now?
From July up to now, in November, a combination of the rapidly rising U.S. dollar index, vicious forced and panic selling of all asset classes and massive deleveraging have helped to put downward price pressure on both gold and silver along with all other commodities. Very large funds and investors that were faced with the need to raise cash have been forced to sell anything liquid, even that which they wished they could hold, in order to meet redemptions, margin requirements or what have you.
Carry trade unwinding has forced offshore investors to buy U.S. dollars as a function of selling off dollar denominated assets. Perversely, the U.S. dollar has gotten the mother of all forex bids during this horrible financial bedlam. Not because the dollar is inherently strong, mind us all, but mostly because it happens to be what things are traded in the most and, thanks to the U.S. Federal Reserve, it is also the most liquid of liquid currencies.
When people are suddenly and violently frightened financially they just want cash and treasuries. Without getting too much more into exactly why, (which could take up all the space allotted to this report by itself), suddenly the dollar has merely become one of the strongest and healthiest looking members of the global fiat currency leper colony. All fiat currencies are sick, but apparently not equally sick.
The dollar is rising and rising fast. Too fast. The spike in the dollar is a signal flare. It is a warning klaxon sounding. This is a flame out just before the inevitable stall.
This week we learn from the World Gold Council that, as we suspected it would from those very high physical metal premiums, all over the world demand for gold has been tremendous, especially in the Middle East, India, Indonesia, Asia and in Europe.
On Friday, November 21, we may have seen a taste of what gold is supposed to do in times of real economic crisis. Why?
As financial terror once again escalated through the week, with equity markets plumbing new depths, fear of systemic financial collapse escalated on the price cave in of Citigroup to just over $3.00. Attempts to explain and to reassure by public officials, including Treasury Secretary Henry Paulson, failed to slow the carnage. While that financial nightmare was unfolding we observed gold holding steady in a tight consolidation range. That was even as the U.S. dollar remained quite strong relative to a basket of other fiat currencies.
Then, on Friday, the heretofore dominant sellers of gold futures across the globe saw their $750 Maginot Line give way as gold powered higher $43.00 or 5.8% in one day. Technicians love consolidation breakouts and tend to gain confidence from them provided they show staying power and follow through right afterwards.
Time will tell whether or not what we saw on Friday is a portent of more to come or a one-off news-driven event, but some of the most astute observers out there today are suggesting that at some point the current “bubble” in the U.S. dollar will reach a crescendo, followed by a hard and fast plunge in the purchasing power of the greenback. These analysts, the same ones that correctly predicted the current set of dire circumstances, continue to encourage people to find safety in gold.
Once the unnatural deleveraging and panic selling pressure becomes exhausted, as analysts say it has to eventually, gold looks set to explode much higher. It is merely a question of when.
On Friday Gold finally broke through major resistance at 776. Today, Gold added to gains with some smart follow through and actually cleared and closed above the 50% retracement of the October 930 to 680 dump which lies at 805. Gold met stiff resistance at 828 when it ran into old support there that is now resistance. A 61% retracement of Octobers dump lies just overhead at 835. Gold has it's work cut out for it up here between 828 and 835.
Silver took a shot at cracking 10.50 today. This is MAJOR resistance for the Silver bulls. A breach would set in motion a major squeeze in Gold's little brother. Meandering here will be punished. Support in Silver lies at 9.96 and 9.75.
The major development of the day was the breakdown in the Dollar's uptrend. The Dollar slipped below it's power uptrend line with a breach of 87 today. The close below 86 only added insult to injury. A breakdown thru 85 could quickly send the Dollar to 83 and it's 50 day moving average. We'll find out what the Dollar bulls are made of when we get to that level. I suspect the hunch by many observers that there are no real Dollar bulls will be confirmed should the Dollar test it's 50 day moving average.
Today's bailout of Citibank by the US Government may, when looking back, prove to be "the straw that breaks the camels back" as the world comes to the realization that the the US has no way to pay for these continued bailouts with out monetizing their debt and in effect severely debasing the Dollar. The mother of all bubbles in the US Treasury market will be the last great bubble to burst, sending the Dollar reeling and Gold soaring.
Despite the potential, it is still to early to declare the Bull back in charge in the Gold market. We have endured too many false starts to get comfortable just yet. Further follow thru is essential. Opportunities for quick trades to the short side will develop, but with the breakdown in the Dollar today, it would be wise to begin buying the dips in Gold now, and avoid selling the rallies. Gold made a powerful technical breakout on it's weekly chart last week that has turned sentiment towards the bulls, but gold must clear 872 and stay there to reestablish and renew the secular uptrend in Gold.
Gold and Silver are among, if not actually, the smallest of all markets traded globally. The deleveraging "story" can only continue so long before all those that wish to sell are finished. A key turning point in Gold may well be it's reaction to the next setback in the general equities markets. Should Gold continue rising at the next downturn in the equities markets, we will have our first clue that Gold's "safe haven" status has been reinstituted, and higher prices are to be expected. Recall that the US Treasury has, reportedly, the World's largest Gold horde, but it's "value" at $800 an ounce is ONLY $280 BILLION. It has clearly dumped over TEN TIMES that amount onto the worlds financial system over the past six months, American Banks in particular, in a feeble effort to bandage the gaping wound in the system. Trillions have been lost in the global equity markets during this whole fiasco. It is hard to imagine that "hedge fund" selling of Gold can continue to have much, if any, effect on Gold prices going forward from here.
A Discredited Dollar Is a Likely Outcome of the Current Crisis
There are no easy policy answers to the current credit convulsion and intensifying financial panic -- not as long as politicians and central bankers are determined not to let financial institutions fail, and so prevent the market from correcting the excesses. This is why this writer has a certain sympathy for Treasury Secretary Henry Paulson, even if nobody else seems to. The securitized nature of this credit cycle, combined with the nightmare levels of leverage embedded in the products dreamt up by the quantitative geeks, means this is a horribly difficult issue to solve.
...the most recent Fed survey of loan officers provides hard evidence of the intensifying credit crunch in America. A net 83.6% of domestic banks reported having tightened lending standards on commercial and industrial loans to large and midsize firms over the past three months, the highest since the data series began in 1990. A net 47% of banks also indicated that they had become less willing to make consumer installment loans over the past three months.
Consumers are also more reluctant to borrow. A net 48% of respondents indicated that they had experienced weaker demand for consumer loans of all types over the past quarter, up from 30% in the July survey. This hints at the Japanese outcome of "pushing on a string" -- i.e., the banks can make credit available but cannot force people to borrow.
What happens next? With a fed-funds rate at 0.5% or lower in coming months, it is fast becoming time for investors to read again Mr. Bernanke's speeches in 2002 and 2003 on the subject of combating falling inflation. In these speeches, the Fed chairman outlined how policy could evolve once short-term interest rates get to near zero. A key focus in such an environment will be to bring down long-term interest rates, which help determine the rates of mortgages and other debt instruments. This would likely involve in practice the Fed buying longer-term Treasury bonds.
It would seem fair to conclude that a Bernanke-led Fed will follow through on such policies in coming months if, as is likely, the U.S. economy continues to suffer and if inflationary pressures continue to collapse. Such actions will not solve the problem but will merely compound it, by adding debt to debt.
In this respect the present crisis in the West will ultimately end up discrediting mechanical monetarism -- and with it the fiat paper-money system in general -- as the U.S. paper-dollar standard, in place since Richard Nixon broke the link with gold in 1971, finally disintegrates.
The catalyst will be foreign creditors fleeing the dollar for gold. That will in turn lead to global recognition of the need for a vastly more disciplined global financial system and one where gold, the "barbarous relic" scorned by most modern central bankers, may well play a part.
The catalyst will be foreign creditors fleeing the dollar for gold. That will in turn lead to global recognition of the need for a vastly more disciplined global financial system and one where gold, the "barbarous relic" scorned by most modern central bankers, may well play a part.
I think WE need a bailout.
ReplyDeleteCheck out current bailouts for us.
Bailout Types for 2009