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Back in April, we alerted
subscribers that the USD appeared to be bottoming. At the time, it was
floating at about 70-72 on the USDX. A whole lot has happened since then to
cause this reversal, with the USD now at 78 plus on the USDX (US dollar index
currency basket heavily Euro weighted). There are many reasons for the
rebound of the USD and its rise is likely to continue. Many of the long term
trends that acted since 2002 to weaken the USD have reversed. The exceptions
are the continuing US trade and fiscal deficits, but those USD bearish forces
are being overridden by these other big bullish USD drivers that have now
appeared in 08.
Let’s make a list of the
USD bullish drivers:
- The US economy fell into recession starting in 07. As the other economies now slow, their currencies
fall, while the USD had already done its falling on the initial
recession concerns. This makes their exchange rates to the USD fall.
- The present turnaround of
the USD goes back to the time it started its big drop, that is from
around 2002, when gold was at a bottom. What this means is that if the
USD is rising due to factors reversing that had been in place since
2002, the USD can rise a good bit and also for a good while.
- The commodity bull market
since 2002 has probably peaked in mid 08 (its way down from the highs
this year). The factors that drove the commodity bull market are also
big long term forces and they are all reversing, hence commodities
correct, and likely will continue to correct.
- The Euro rose a great deal
since 2002 vs the USD and that is now reversing, which means the Euro
has a good way to correct from here. That is very USD bullish.
- The EU economies are
slowing rapidly, even crashing (Spain, UK, Club Med, Baltics), that is
cutting the ground from the Euro. The housing bubbles there are now
crashing.
- The Asian economies are
slowing quickly, and even China is acting to support their stock markets
that have crashed 60% in the last year. That is hurting commodity
fundamentals. Weaker commodity prices are deflationary in general, and
that is USD bullish. (I want to point out something here. When there are
big swings in a market from a long bull to a bear, typically the market
analysts are the last to admit the change from bull to bear as they have
been so caught up tracking the bull for years. We try to consider this,
and here, think it’s time to start considering that the multiyear
commodity bull market that attracted speculators is now turning
decidedly).
- The speculators that had
piled into commodities are now realizing that party is over, and
considering that they had been hanging out in commodities for several
years, that means a lot of them want to get out but can’t do that
too quickly or they crash the prices and take losses. They are stuck.
But they are going to continue selling.
- The US is likely done with interest rate cuts, having led the pack in 07 cutting rates to 2%,
while the ECB is going to have to start to cut and traders are bidding
the USD up and the Euro down on that expectation.
- The ECB is losing patience
supporting markets and financial institutions as, this week, it started
restrictions on taking the bad collateral from banks
‘abusing’ that. That adds to overall deleveraging and flight
to cash.
- Pimco’s Bill Gross
just stated that the US treasury needs to act quickly to support the
markets or there will be a ‘tsunami’ of deleveraging in all
financial markets as funds are now finally starting to bail out,
realizing that there is likely no recovery of the US economy. They had
held out hope since 07 for that recovery, but that is now clearly not in
the cards. So they are bailing out. Deleveraging is USD and carry trade
currency bullish.
- There is a lot of general
deleveraging in markets and in credit markets. A lot of big investors
are going to cash and quality sovereign bonds, such as US treasuries,
and this demand for cash is strengthening the USD and the US treasuries.
- Financial institutions are
again hoarding cash in the US and the EU. While this is bullish for both
currencies, the USD is benefitting more than the Euro. That is going to
continue through the end of the year. This cash hoarding occurred in 07 in the last quarter. At that time, the USD strengthened several points on the USDX during that
time. The way the USD is going now, already over 78 on the USDX and this
being September, the USD can easily breach 80 and higher on the USDX by
the end of the year because of the cash hoarding.
- Money is coming back into
the US from the formerly hot foreign markets, as people realize that
party is over. Also, there is capital investment coming back into the US
as EU manufacturers seek to move production to ‘dollar
zones’ as costs are too high in the EU with the strong Euro. Asian
manufacturers are also moving money back to the US and moving manufacturing here because of a cheap USD and also high fuel/energy costs
which are said to be a bigger part of their costs than actually making
the stuff.
- There is capital disinvestment
in the EU region and that is Euro bearish.
- A lot of speculators are
now reversing their former USD bearish trades they had for years.
Most of these huge macro trends,
that are USD bullish, became clear this year. Hence, the USD rallied from 70
on the USDX to 78, an 11.4% increase in only a few months since April. While
it’s possible the USD could correct a bit within that range, it appears
the USD is headed higher, and for a while too.
Stronger USD means commodity
correction
This means that the commodity
correction is likely to continue and precious metals likely to continue their
correction to levels that were concurrent with the USD in the 80’s on
the USDX. This would place gold in the $600 to $700 range. Remember, gold is
a foreign exchange asset and central bank reserve asset, and should be
considered in that context. Its primary valuations are based on currency
exchange rates. The speculative froth in gold is exactly that, froth, and not
a primary gold driver. This is why we have told subscribers to look at gold
as savings and not to demand big gains, but to see gold as savings. The
speculative froth in gold comes and goes.
One caveat on that gold price is
if there are any new serious credit meltdowns. The credit crisis was a
primary driver for gold to rise from $660s in August 07 to over $1000 this
year. And, as always, a war in the Mid East would be super gold and oil
bullish.
Again, we point out that while
the USD has terrible fundamentals related to the US trade and fiscal
deficits, the other gold bullish factors we list above are overriding those
bearish deficit factors at this time. These present USD bullish factors are
very big macroeconomic drivers, and are big changes from recent years. That
means the USD can rally and stay rallying for a good while.
We believe that precious metals
should be kept against a USD devaluation event that will likely happen within
several years, but for now the USD rallies, and has good reasons to rally for
the present.
Our subscribers have tracked all
the trends above the whole year. And they have been alerted well in advance
of the turnaround in the USD and its bottoming since April this year. As far
as I know, we were one of the first to call the USD bottom in April.
The Prudent Squirrel newsletter
is our financial and gold commentary. Subscribers get 44 newsletters a year
on Sundays, and also mid week email alerts as needed. The alerts include
quick notification of important financial news developments by email. Subscribers
tell us that the alerts alone are worth subscribing for.
I had one potential subscriber
ask me if the newsletter has much more content than these public articles,
ie, if it was worth subscribing. The answer is that the public articles have
less than 10% of our research and conclusions that subscribers see, not to
mention the subscriber email alerts of important breaking financial news. We
have anticipated many significant market moves in the last year, such as
imminent drops in world stock markets within days of them happening, and big
swings in the gold markets within days of them occurring. We have also made a
number of good calls on big currency swings, such as with the USD, the Euro
and the Yen.
Chris
Laird
Prudent
Squirrel
Chris Laird has been an Oracle
systems engineer, database administrator, and math teacher. He has a BS in
mathematics from UCLA and is a certified Oracle database administrator. He
has been an avid follower of financial news since childhood. His father is
Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He
has grown up immersed in financial news. His Grandmother was Alice Widener,
publisher of USA magazine in the 60?s to 80?s, a newsletter that covered many
of the topics you find today at the preeminent gold sites. Chris is the
publisher of the Prudent
Squirrel
newsletter, an economic and
gold commentary.
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