Monday, July 31, 2006


Is The US Dollar Bear Market Back?

Bloomberg looks at the US dollar. "The bear market in the U.S. dollar is back, some of the world's biggest money managers say. The U.S. currency dropped against the euro and yen last week as a government report showed the economy expanded less than analysts had forecast in the second quarter and reduced the chances the Federal Reserve would raise interest rates."

"'Once the Fed is out of the picture, you are going to see the dollar weaken,' said Paul Barrett, chief currency trader at J.P. Morgan Private Bank, which manages $332 billion in New York."

"'Geopolitical events don't have a sustainable impact on the dollar,' said Ryan Shea, a currency strategist in London at State Street Global Markets, custodian for $10.7 trillion of investor assets. Investors 'seemed to get over the panic point quite quickly.'"

"The dollar has weakened 7.8 percent against the euro this year and 3.1 percent versus the yen, putting it on pace for a fourth annual drop in five years. The U.S. currency rallied about 14 percent against both last year as the Fed raised interest rates. 'The odds are it's the start of a bear market for the dollar,' said John Taylor, chairman of a New York firm that manages $12 billion in currencies. He predicts the dollar will return next year to its record low of $1.3666 per euro sent in December 2004."

"Gold futures closed slightly lower Monday, to end July with a gain of about 3%, with metals traders remaining cautious about developments in the Middle East and hashing over what to expect from next week's Federal Reserve monetary-policy meeting.
Gold futures closed down 60 cents at $634.20 an ounce after trading in a range of $627 to $635.80 an ounce."

"Peter Grandich said he expects Aug. to be the month in which gold breaks above key resistance between $640 to $660, pushed there by dollar weakness, global political concerns and strong demand."

"Silver closed up 0.1 cent at $11.37 an ounce, and gained 4% on the month. Platinum rose $7.30 to $1,241 an ounce, but lost 0.1% on the month. Palladium rose 3% to close at $317.15, for a 2% decline on the month."

"Harry Schultz's latest letter arrived Sunday night. He offers this acid assessment of the recent rally: 'There is a paradox in market prices as I write. We have gold, U.S. dollar, oil and most stock market indexes all showing a readiness to move up. It is an illogical combo. It may be a temporary fluke or it may be there's manipulation of the indexes going on.'"

"Schultz, never afraid of a radical idea, takes manipulation seriously. He says: 'It is fairly easy to manipulate stock indexes via just three or four blue chips, and the multinationals appear in several indexes. We've seen it before. Most stock markets were in virtual free fall and suddenly reversed into reverse head-and-shoulders buy patterns."

"This is a rarity. The U.S. dollar index may also be subject to manipulation.'
His diagnosis: 'Some governments are getting desperate re some market action in the face of elections. Painting the tape is an old game.' His diagnosis: 'Monitor all these key market charts to see if something breaks rank and reveals a more 'logical' picture.'"

"Schultz's macro analysis continues to be dark: 'The world is on a knife edge between inflation, which often suddenly gets out of control when it passes point X, and deflation, when monetary liquidity suddenly falls behind the X-factor point to keep economies afloat (or triggered by a major debt default or by stock market implosions, e.g. South east Asia markets a few years ago). Being wrongly invested when a 'flation-tsunami' hits, can (and often does) slash a portfolio's value by 40% in 72 hours.'"

"Fortunately, says Schultz, gold protects against both 'flations,' 'though it is usually 'relative' in deflation.'"

"Schultz thinks there's a 40% chance the US will go into recession in early 2007, 50% if the Federal Reserve raises interest rates to 6%.'"

Some related links:

'ZIMBABWE'S central bank devalued its dollar by an effective 60 percent on Monday and knocked three zeros off all banknotes to help consumers cope with hyperinflation of nearly 1,200 percent.'

'Governor Gideon Gono also slashed lending rates by 550 percentage points to 300 percent to try to kick-start an economy which has shrunk by more than a third during an 8-year recession.'

'GROWTH of the yuan in the past two months has accounted for a third of the combined rise since the currency was revalued last July on escalating hopes China may let it appreciate faster to tackle economic problems.'

'The Chinese currency hit 7.9650 against the US dollar yesterday, the highest level since authorities lifted the yuan by 2.1 percent and managed it against a basket of currencies on July 21 last year.'

'The central bank is likely to follow up with more decisive liquidity withdrawal, as well as faster yuan appreciation through widening the yuan/dollar trading band," said Liang Hong, chief economist at Goldman Sachs (Asia).'

'Shares of Scottish Re Group Ltd. plunged about 75 percent on Monday after the reinsurer warned of a big second-quarter loss and said its chief executive, Scott Willkomm, had resigned. 'Ability to remain as ongoing concern is in doubt,' wrote Richard Sbaschnig, an analyst at Oppenheimer & Co, in a note to clients, He downgraded Scottish Re to 'sell' from 'buy.'
The IMF said today the USD is overvalued by 15-35%. I think the high end of the estimate is closer to true. Imagine a 30-50% drop in the value of the dollar. Ouch.
In a dollar devaluation, is one better off living in a house with no mortgage or selling the house and sitting in cash?
Depends. You can't board up the windows in a rental and convert it to a battle-worthy survival fortress. On the other hand, you can leave a rental at any time with your Au in your pockets. I would think a F&C house and pocketfuls of Au & some cash would be the best of all options. Even if everything goes kaput, you've still got a F&C house and Au, just trade the cash to the greater fools.

Funny stuff here for the tin foil hat crowd:
Watch for "The Last Contango in Gold and Silver"!
Recently the metals have tracked the markets, but today the metals are up and the markets are down. Interesting divergence...
Saw this comment elsewhere:
"Today's PCE is showing what $500 gold was telling us last year. Just wait till the $600 gold message hits the lagging 'inflation' state."
Maybe it's not "one and done" yet again, and that's why the market didn't like the number?
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