Wednesday, August 09, 2006


Is The Fed Pause A 'Definitive Moment'?

Financial Times looks at the post-pause landscape. "The US dollar drifted lower on Wednesday as market attention turned to the fate of the greenback if the Federal Reserve has, as many now expect, reached he end of its tightening path. With the pause widely expected, the dollar's decline was muted. 'The end of the Fed's tightening cycle has been greeted with a whimper,' said Steve Pearson, chief currency strategist at HBOS."

"However, opinions were acutely divided as to where the dollar is going next. Neil Mellor, currencies strategist at Bank of New York, argued that the turn in the US monetary cycle 'could ultimately be regarded as a definitive moment in what many economists believe to be an inevitable resumption of the dollar's downtrend.'"

"Todd Elmer, analyst at Citigroup, citing mounting evidence of slowing US growth and ongoing structural problems, added: 'We find solid grounding for our conviction that the dollar will see new lows in the months ahead.'"

"However Mr Pearson, one of the few remaining dollar bulls, argued that most of the bad news was now priced in for the greenback. 'Given Fed funds futures are now discounting just a 32 per cent chance that the Fed hikes again, we see little further downside for the dollar from the domestic interest rate outlook unless markets start to contemplate rate cuts,' he said."

"If Thursday's US trade data do not undermine the currency, 'the worst may well be over,' for the dollar, Mr Pearson said."

"Gold was rallying again Wednesday as investors fled the U.S. dollar and oil prices climbed. December contracts for the yellow metal reached a high of $666.50 an ounce before retreating to close up $4.70 at $662 on the Comex."

"'Gold continues to work hard on all cylinders,' says Peter Grandich. 'The main thrust is heightened geopolitical tension, but it will be the declining dollar that pushes the yellow metal's price to new highs.'"

"Another bullish factor for gold was ongoing concern over inflation, with some investors worried that the Fed may have missed the boat Tuesday when it paused its two-year rate hike program and left the base borrowing rate at 5.25%. 'Inflation is a lot worse than the Fed lets on,' says Peter Schiff, president of broker-dealer Euro Pacific Capital. 'If they were [truly] concerned about inflation they wouldn't have paused.'"

The Financial Times on China. "China’s central bank stoked expectations of a further renminbi appreciation on Wednesday by saying the exchange rate could play a role in addressing international payments imbalances."

"The statement, in the People’s Bank of China’s second-quarter monetary report, came amid speculation that Beijing is poised to take a bolder approach towards the renminbi after keeping it under tight control since scrapping its peg to the US dollar a year ago."

"The bank stressed that international payment imbalances could 'certainly not be resolved solely by relying on exchange rate appreciation.' However, it said 'appropriate use' should be made of the 'special effects' the exchange rate could have in efforts to adjust the structure of the economy and achieve 'overall balance.''

"'As part of a package of measures, the exchange rate can play a certain role in addressing the imbalance in international payments,' the bank said."

"some analysts said the report supported the view that a consensus was forming among Beijing policymakers behind a stronger, more flexible currency. 'It is a signal of intent,' said Huang Haizhou, head of Greater China research for Barclays Capital. 'It shows increasing readiness for further renminbi appreciation and for widening of the band.'"

As with the Tech & Housing bubbles, the beginning of the end of the dollar will only be fully recognized in hindsight.

Got gold? :-)
From the Mogambo Guru's latest E-economic Newsletter:

This gem, in USA Today, read "The Bush administration opposes including Social Security and Medicare in the audited deficit. Its reason: Congress can cancel or cut the retirement programs at any time, so they should not be considered a government liability for accounting purposes." Hahaha! If you want a good feel for your future Social Security benefits, here it is! They already know it's going to be slashed, and so they don't even have to account for it!

Wow, the press found a dollar bull! Those are even rarer than ruby-throated flycatchers. I hope they took a photo for posterity.
If you haven't already, check out Roubini's blog today. Very interesting stuff.
Big boys are really manipulating gold. I'd like to see the curtain pulled back and find out who's pullin the strings.

Shit should be $700 plus with war in the mid-east and the USD falling faster than a rock, not too mention inflation still lurking...

I'm going to take about 35% off the table and put it into a everbank swiss franc CD. Real chance gold may drop into the $500s soon...but again long term trend is bullish.

Guys I've never seen so much manipulation and uncertainty in the today that Hedge funds account for 50% of all market trades...tough to compete and if you're on the wrong side of that trade you get crushed.

Can't argue with you... after the pause, we should be going up (at least slowly). They're really trying to give the impression that inflation is contained. When they eventually lose that battle, everything will go to hell quickly.

I believe Fekete's "Gold basis" arguments support yours, too; the hedgies -- especially those working in the government's interest -- pin the PMs down through derivatives. It's a very poorly kept secret that there are more derivatives than underlying physical.
TJ, what Fekete is saying is that when the gold basis or spread between spot prices and the nearest futures price goes to zero or negative (backwardation as opposed to the normal state of contango), it is an indicator that insiders have information that a financial collapse is imminent. Right now, contango is about as wide as it's been for some time. I saw that Laurie McGuirk (Minyanville) noticed this last week.
Jdog, don't blame you but I'm not so sure the hedgies have much to do with this price action although Laird thinks so, and the CB's are weak on supply, with others such as Russia and China supposedly increasing Au reserves. Western CB's aren't going to drive prices down just so Russia and China can buy at a discounted price.

So, what to make of today's action? Profit taking and a bit of fear? I don't know but I was hoping for one more drop before Sept/Oct as I'm just sitting on cash ready to buy more.
Coincidentally, I just found some comments by Laurie McGuirk today:

"Central Banks cannot control the price of gold without suffering massive loss of physical metal for their efforts."
"Big boys are really manipulating gold"

"To Barrick or to be Barricked, That is the Question"
by Antal E. Fekete

Fascinating... is an indicator that insiders have information that a financial collapse is imminent.

IOW, the manipulation games are up, because all the PMs that supposedly underly these derivatives are suddenly no longer available. Yes, I know what he means -- that's why I'm just a steady accumulator of physical PMs.

Goldbugs buy & sell by the ounce in cash; hedgies and their ilk buy hundred-ounce contracts on credit. It's no wonder they can influence things.

However, too many people have that uneasy feeling about the world right now, thus the slow but inexorable rise in metals will continue... until the gold basis ends, at which time the sky's the limit.
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