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Even to the casual observer it's now apparent that
the financial world is one giant see-saw. On the one side of swing is the
once Almighty Dollar and on the other side is every other investable
asset class.
Wherever the Dollar goes in 08, stocks, bonds and
commodities will head the other way.
Call it the liquidity trade, call it the end of the
Dollar, call it what you like but the long held truth of inter-market
analysis has been superseded by one factor and one factor alone - what's the
Dollar doing?
Since 2003 we've seen all asset classes rise in
tandem whilst the Dollar fell. Once upon a time we were accustomed to simpler
logic such as rising commodity prices were inflationary and caused higher interest rates and a lower stock
market Or Gold is a counter-cyclical investment that does well when other
asset classes such as stocks are falling. That kind of logic no longer seems
to hold.
It seems the Dollar has so much value stored up
inside it that when it falls its like the sun
throwing off a mass of energy in its wake.
But the Dollar like all other markets doesn't fall
continuously (even if it should fundamentally) and when it rises, however
small, it sucks back a portion of the value it has given off, causing stock markets, commodities and even
non-sovereign debt to plummet in value.
Thus we would say to the causal
market observer, if you want to know how to make money in this environment,
all you need to know is essentially whether the Dollar is rising or falling. And
if it's falling, buy the asset class you're most familiar with be it real
estate, stocks, debt, art, antiques etc.
So where is the Dollar headed?
Chart 1- US Dollar (top) vs. Real 3-month interest rates offset 1 year
(bottom)
Most Economic 101 classes teach that the exchange
rate between 2 countries is calculated as the interest rate differential
between them. For example if country A yields a real rate of return of 4%
p.a. and country B 3% p.a. then over time money will move from the low
yielding country B to the higher yielding country A and the exchange rate
improve in favour of country A.
We attempted to do the same thing by calculating the
'real' rate of 3-month treasury bills by comparing them to the price of Gold
(bottom). We then noticed an interesting correlation. By offsetting the real
rate on 3-month bills against the US Dollar by 1 year we could predict the
trend in the Dollar for the following year.
Correlations are never perfect and tend to fail just
when you need them most, but this record is impressive. For example, the real
rate of interest turned higher in 1994 and the US Dollar made a sustained
move higher in 1995 (red rectangle). Or how about the MAJOR turn in the
Dollar in 2002? That was predicted a year in advance by the turn in real
short term rates.
The current situation is fascinating because the real rate of interest plummeted this year
(3rd red rectangle) as short interest rates plummeted and Gold challenged
generational highs. If the correlation continues then the Dollar is in for
more downside in 2008.
Our expectation is that the current rally in the
Dollar will finish at its green downward trending line and its 50 day moving
average - both at around 80. Thereafter we foresee the Dollar falling to
all-time lows and correspondingly a strong stock, commodity and even bond
market in '08.
More commentary and stock picks follow for subscribers…
Click here: http://blog.goldandoilstocks.com
_______________________________________________________________________
This article is intended solely for information
purposes. The opinions are those of the author
only. Please conduct further research and consult your financial advisor
before making any investment/trading decision. No responsibility can be
accepted for losses that may result as a consequence of trading on the basis
of this analysis.
Information
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accuracy cannot be guaranteed. It is not intended to constitute individual
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situation. The opinions expressed herein are those of the author and are subject to change without notice.
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