Thursday, June 01, 2006

 

US Dollar Gets A 'Feel Good Effect'

Lots of currency and commodity news today. "The dollar edged up against most major currencies Thursday even after the release of disappointing data on manufacturing activity and construction. The dollar slipped after the two reports came out, but rebounded after the Energy Department reported that domestic oil and gasoline inventories rose last week, according to Michael Woolfolk, a senior currency strategist at the Bank of New York."

"'What we're seeing now is a moderation, a feel good effect after the three reports,' Woolfolk said."

"The euro bought $1.2797 in afternoon New York trading, down from $1.2814 in New York late Wednesday. The British pound fell to $1.8643 from $1.8689. The dollar strengthened against the Japanese currency, rising to 112.68 yen from 112.59 yen. In other trading, the dollar bought 1.2217 Swiss francs, up from 1.2182 late Wednesday, and 1.1021 Canadian dollars, up from 1.1011."

"Asia’s economic powerhouses, which have pushed commodity prices and regional stocks to record highs, may have spewed out some of their best growth numbers for the current four-year expansion phase during the first quarter. But India and the resurgent export powerhouses South Korea, Taiwan, Hong Kong and Singapore are unlikely to be able to sustain such growth in coming quarters as soaring energy and commodity prices dampen consumption and stoke inflation, forcing central banks to raise the cost of money, analysts said."

"China, where annual growth in investment spending accelerated to almost 28 per cent in the first quarter after a 25.7 per cent growth in all of 2005, could be the sole exception as money for factories, roads and ports continued to pour in, they said."

"Demand from the US economy, which has powered much of the current phase of Asian expansion that followed the deadly severe acute respiratory syndrome outbreak in 2002, is also set to sputter as high fuel prices and falling property prices hit personal consumption."

"'The best is behind us. First quarter would have been the peak,' said Arjuna Mahendran, chief economist for Asia at the private banking arm of Credit Suisse in Singapore. 'There will be a pause in the US economy in the third quarter. That will have ramifications for Asia.'"

"Gold futures closed above their worst levels Thursday, but still ended the session at a six-week low with traders using strength in the U.S. dollar as an excuse to continue to lock in recent gains. Gold for August delivery finished down $15.50 at $633.50 an ounce on the New York Mercantile Exchange, its weakest closing level since April 24. It fell as low as $625.70 early in the day, a level not seen since April 20."

"'Lest anyone had remaining doubts that gold is (also) a two-way market, this morning's implosion in the price was probably enough to do away with such uncertainty,' said Jon Nadler, at bullion dealers Kitco.com."

"The combination of a temporarily weak dollar, a steep sell-off in the copper pits and fresh round of fund liquidations have gold starting to look 'as if it really wants to complete a full 50% correction from last month's highs,' he said. 'Such a move could indeed bring it anywhere near $585 to $600 in coming sessions.'"

"July silver closed down 55 cents at $11.905 an ounce, falling below the $12 an ounce level for the first time since May 22. July platinum ended down $17 at $1,229.80 an ounce and June palladium lost $9.85 to close at $337.40."

"Peter Grandich said today's close below $635 'could suggest a test of the psychologically important $600, but the real long-term support is in the $575 area.' The key in the coming days and weeks is to view this as a correction in a secular bull market, not the end.'"

"A commodity price 'bubble' may not burst until the fourth quarter, when higher interest rates slow economic growth and demand for crude oil, copper and other raw materials, Societe Generale (SocGen) said."

"Commodities including zinc and platinum have reached records in the last several months. Prices may rise further in the third quarter because of speculation about supply disruptions and declining inventory, Frederic Lasserre, Paris-based head of commodities research at Societe Generale, France’s third-largest bank, said."

"'The idea of a bubble is starting to gain popularity among investors,' Mr Lasserre said on Wednesday. 'But the bubble cannot burst until there is a consensus that it exists in the first place. We are not there yet. We believe that this correction does not yet mark the end of the bull run and that performance should remain spectacular until the fourth quarter,' Mr Lasserre said."

Comments:
'Peter Grandich said today's close below $635 'could suggest a test of the psychologically important $600, but the real long-term support is in the $575 area.'

A good example of technical analysis, versus what the public thinks is important. It will be interesting to see if these levels are tested and what comes out of it.
 
I am not against TA, but I balance it with fundamentals. The dollar may get a warm fuzzy feeling, but it won't last. Wait to buy at $575 and you may never get it. Most people agree the trend will be up; good luck picking the bottom.
 
I am getting absolutely MURDERED with gold right now, but the funny thing is Im not the least bit concerned for some reason. Im going to hold back before buying more in the "hope" that it drops further.

Since Ive got 3xs as much cash in USD then gold I suppose its a good thing gold is falling and the USD is rising? I still stand by my previous prediction of $810 gold by year end.
 
You might want to give that lack of concern a second thought, jdog

Bloomberg: Nickel, Copper Plunge, Reviving Speculation Metal Rally Is Over (today):

June 1 (Bloomberg) -- Nickel plunged the most in 19 months, and copper's decline reached the trading limit in New York, reviving speculation that the rally in metals may be over. Gold fell to a five-week low.

``These markets have been highly driven by speculation rather than fundamentals,'' said Steven Allen, who manages $22 million commodity-based stocks at the Preservation Capital Management LLC in Frankfort, Illinois. ``This is part and parcel of speculators hitting the uptrend and exiting the door at the same time.''
...
Gold has lost almost 4 percent of its value the past two days. The minutes of the Federal Reserve's May 10 meeting released yesterday suggested the central bank may continue to raise interest rates. Higher rates make holding gold less attractive because the metal has no fixed returns, unlike bonds.

``The minutes of the FOMC meeting make it clear that the Fed's propensity to pause is far lower than had been thought reasonable,'' said Dennis Gartman, editor of the Suffolk, Virginia-based Gartman Letter. ``Rising rates are an anathema to precious metals.''

 
Rising rates may mean higher returns on bonds, if you weren't in debt. Unfortunately, we are in massive debt. That means higher payments servicing the debt. That means more foreclosures. That means at some point the mortgages packaged up and sold on the market go sour. That means foreigners losing confidence in our dollar unless rates go much much higher. The Treasury and Fed are in a pickle for sure. Nobody, including the people getting paid a lot of taxpayer money, knows what to do. OK, maybe they do, but figure the American people can't handle it. Maybe they are correct, but we'll have to in the end. And in that end, those who hold the gold (whether countries or individuals) will make the rules. I am holding off on buying for now, but I'll be buying some more in the future. They call them precious metals, and not precious dollars, for a reason. Economics isn't a pure science. If it were, there wouldn't be so much speculation on what is going on, with everyone and their brother holding a different idea. E=mc^2 is a given until proven otherwise. It has stood for quite awhile. Will it be a given 1,000 years from now? I don't know, but it is a given for now. My point is, E=mc^2 doesn't care about greed and fear. Most principles in econ hold, but greed and fear can put them totally out of whack for a long time. Hence the "conundrum".
 
That means at some point the mortgages packaged up and sold on the market go sour. That means foreigners losing confidence in our dollar unless rates go much much higher.

I'm not sure I follow that. How does a default on private debt affect foreigners' confidence in the dollar? If I loan you $100 and you fail to pay me back, I wouldn't lose confidence in the dollar, I'd lose confidence in you as an individual. If Uncle Sam defaults on treasuries, that's a different story..
 
Agencies give loans to just about anyone since they don't hold many of them. They are bundled/sold on the stock market. Folks "investing" in these are the ones holding the receipt. When they go bust, that will hurt significantly those holding the receipts. When that happens, the solution the Fed uses every time I've witnessed a problem is to cut rates/cut taxes/raise debt ceiling/bail folks out. Nothing in life is free. Someone is paying, and that would be the folks holding/accepting dollars everywhere in the world (it is truly the best racket I've ever seen when you think about it...and no one has even caught on...yet...almost like taxation without representation). If foreign gov'ts are holding trillions, and we're creating trillions more, I'd be getting rid of them pretty quickly. If foreigners were paying attention, they saw we just upped the debt ceiling by just about 2 trillion. That's just about as clear a signal as any that a lot more money was created. If I've got a credit card maxed out at 5K, and someone gives me a another card of 5K, bingo, just created 5K more dollars. The trick is, as long as someone thinks I'll pay them back with enough interest to make the purchasing power of that 5K at least 5K, plus a little for mom and the kids.

As for defaulting on Treasuries, not possible as long as we can create our own currency. We can always pay back. It just might be that no one will want it. They surely won't be lending us any more.
 
thejdog:

Since Ive got 3xs as much cash in USD then gold...

And that's after buying 600+ ounces? I wish I was as well-positioned for the future. But then again, I'm sure it's not enough for you, too! ;-)
 
john in va,

Real rollercoaster, isn't it? That's why PMs aren't for the faint of heart. NBD here.

Although it was nice to see the PM's potential put on display, it definitely was going to far too fast. Again, the fear isn't there yet and won't be for a while. This is exactly why I say it's still early in phase II.

Since I'm far from my goals for accumulating PMs, it'll be nice to be picking up a lot more for a given chunk of change, too.

BTW, parts III & IV of my depression case -- "What's Happening Now..." -- on the way soon.
 
I have to say that I am not really sure what the markets are doing today.
Looks like Fed is very concerned with inflation, which means a June hike is more likely than not. That results in the gold taking a beating. But why is that good news for stocks, especially the NASDAQ? What's up with stocks?

Other economic indicators are conflicted at the best. Some retailers are up, some are down, overall still robust. Construction is down a bit, but productivity is up. None of them is earth shattering.

My other question is how come consumption is still up? Refi is down, wages are up just a bit but still mostly flat. Did people go deeper in debt in May? I guess the consumption was done mostly at high end stores.

Can we say lower rungs of society are starting to feel the hurt. Fundamentals of the economy are not supporting the stock rally today. And all things will be pointing to a downturn at the end of the year.

Gold may hurt till Fed pauses or starts to ease when recession hits. It might still have $50 to go southward. It is good hedge against inflation so it will hold up and move up from there.

The markets are trying to figure out what to do, just as Fed. But one thing is for sure, the economic fundamentals are deteriorating. Do we agree on that?
 
gold is only down 15%, that's nothing. that's not even a blip compared to other corrections.
 
John in VA,

Just wanted to say... Keep up the contrarian angle! Always appreciate alternate viewpoints; don't want tunnel vision.
 
TJ - Just 400oz (plus a few coins)...couldn't pull the trigger on that other 200oz trade....thank god....and oh... thank you housing bubble. It was good, no incredible while it lasted.

PS - I'll be looking to make that trade at around $595-$610. I just do not see gold dropping into the mid 500s. Please keep in mind, the USD $ the economy aside, gold is still more closely tied to the hip of oil then anything else and oil is in the ultimate bull market.
 
john in va said...

You might want to give that lack of concern a second thought, jdog

Agreed. Might just turn into the regret of a lifetime. But I'm still sleeping OK...
 
Jdog, I feel your pain, but have the same sense of no worry. It's only money, and in this case, better than money. I'll make more anyway. Also, just wanted TJ and John to know that I've really enjoyed reading your posts over the last few weeks.
Anytime you need reinforcement on your gold buying decisions, I suggest you read/re-read Dudley Baker's 3 part (of 6) compilation of "Ominous Warnings and Dire Predictions of World's Financial Experts" (Safehaven).
Also, read Sean Corrigan's speech "What Does the High Price of Gold Mean?", IMO one of the finest commentaries on Gold ever written.
 
Welcome Fred. Always good to see new people on here and have them participate.
 
Another short-term lurker, first time poster here. I've been following some of the discussions here in the comment threads and wanted to get you folks opinion in silver as compared to gold. I've recently started investing a small percentage of my disposable income in junk silver, bought as close to spot market as I can find it. I'm not interested in short term trading and I am not really interested in methods that don't allow me to take physical possesion of the metal. I'm mainly in this to get some insurance for the rampant inflation that seems likely to be bearing down on us. Given the relatively low markup of junk silver, the current ratio of gold/silver (50+), and that fact that my weekly investment won't cover a full ounce of gold, it seemed like silver was a good fit for me. I'm trying to learn as much as I can as fast as I can but would appreciate any insights you all might have.
 
here is a good start.

Silver Investor

Real Silver Highs

Silver/Oil Ratio Extremes
 
SilverHwk,

Silver has everything going for it that gold does and more. I personally favor silver, but have so far split my money just to be prudent.
 
The markets are trying to figure out what to do, just as Fed. But one thing is for sure, the economic fundamentals are deteriorating. Do we agree on that?

Yes, I agree. I think that the Fed under AG has created unprecedented stability with a flood of easy money and that has been compounded by a massive flow of funds into completely unregulated hedge funds, whose managers are taking extreme risks (with massive leverage) in search of harder-to-find returns.

Kerk: the solution the Fed uses every time I've witnessed a problem is to cut rates/cut taxes/raise debt ceiling/bail folks out.

I agree with this assertion, if the Fed does in fact respond with a massive liquidity injection. However, this isn't the same thing as saying that a default on MBSs itself would cause foreigners to lose confidence in the dollar - you're saying that the likely Fed response would. In other words, it would be the treatment that kills the patient, not the disease.

tj: Keep up the contrarian angle! Always appreciate alternate viewpoints; don't want tunnel vision.

Appreciate it, tj! Someone's got to be the resident contrarian :-) At the end of the day, however, I'd rather be wrong than see friends lose money.

jdog: Might just turn into the regret of a lifetime. But I'm still sleeping OK...

Often a sign of having one's life priorities in the correct order...
 
created unprecedented stability

...should have read "instability"
 
I will admit I am a gold bug. I have been accumulating gold/silver
for a couple of years. I like silver because if we(gold bugs) are
completely wrong and the world economies keep growing and consuming commodities, then silver will still increase in value. I think if the global economies fall in to a recession/depression, the bull market in commodities will end....But silver and gold will hold their value...I read that the Kennedys made a lot of money during the depression with gold ...Anyone else hear this?
 
jdog!
"I just do not see gold dropping into the mid 500s."
But I do. And I am not even contrarian. I follow Adam Hamilton's technical commentaries and seems to me that we should expect gold to go to 200ma.
POG and 200ma can meet at 550 or so. I am looking at 525 to 575 range as a bottom. Then I will be looking for a good entry point.
And since you've been called contrarian, what is your take on this metal bull market?
 
"And since you've been called contrarian, what is your take on this metal bull market?"

With metals it's an inflation story....but also a cycle and emerging markets story.

With PMs you get the added bonus of a hedge against a falling USD and possible catastrophic geo-political events.

Also, most bull markets last far longer then conventional wisdom dictates.
 
This comment has been removed by a blog administrator.
 
BB was trained and studied for all his profession career to do anything but cause deflation. Like any soldier who trains he entire life for combat and finally gets into it, he will not go against everything he trained/knows/studied. Even if he does, he's in new territory and the chances to trip up are high. This is his big game, his life's legacy and I think we know what Bush brought him in to do.
 
FANTASTIC post mr sd cdl.

what is it you think he brought him in to do, keep the markets inflated? he'll probably just keep causing inflation in commodities.
 
Sd cdl
"I think we know what Bush brought him in to do."

I don't think Bush understands financial system enough to bring "inflationist". That leaves the open question who recommended BB? I will side with conspiracy theorists on this.
But it is very good point SD CDL. We clearly know who will be right : deflation crowd or hyperinflation crowd.
 
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