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A month or so ago, we
told subscribers that the USD appeared to be bottoming. Long term, the USD
has big trouble on the horizon, but we mentioned the USD has 9 lives, even
though the US is running terrible deficits, trade and fiscal.
The Euro had
strengthened so much since 2002, and the USD took such a hit, that gold and
commodities became hot sectors that attracted lots of money for years. Right
now, we are witnessing a big chunk of that speculator/investor froth coming
out of gold and commodities. Oil is still relatively resistant. The
perception that the USD can recover in a meaningful way is now out.
Also, gold is being sold off to cover margin calls in other commodities.
The advent of the
credit crisis caused a gold price explosion, and gold’s big spikes
since August 2007 tracked credit developments. The credit crisis caused gold
and commodities to explode as the central banks threw about $2 trillion, and
counting, of lending to prop up their respective financial institutions. The
credit crisis has been gold’s key market driver since August 07.
Shift of gold market
focus now to USD
Then, this Summer, a
sort of seismic shift occurred, where the US economy had been slowing for
roughly a year, and that naturally spilled over to both the EU region, and
Asia. The perception recently became that the Euro likely had overshot its
rise. After peaking at about $1.60, the Euro turned down when it appeared the
EU region was slowing. That scared Euro bulls, and the USD turned back up. The
prospect of a recovery of the USD is now the key gold and commodity market
driver.
Of course, any new
serious development in the credit crisis can cause that to return to the key
focus, and a gold rally. But, right now, the credit crisis has switched from
being the key gold driver, to the new key driver, the prospects/implications
of a USD rally.
Gold and commodities
have rallied for years, as the USD fell since 2002, and some of the 30% plus
speculator premium is coming out of them. The recent declines of the CRB and
gold reflect that. It remains to be seen if this is only a correction
of the gold and commodity market. But midterm, the prospect of a rally of the
USD that can last is having its effects.
This USD rally goes
back to what started in 2002
What gives this gold
and commodity sell off such power is the prospect of a USD recovery in
context to the long USD decline since 2002. Enough structural change is
happening to the world economy (weakening EU for example which calls into question
the Euro’s strength), and improvements in US export competiveness
suggest that the USD recovery right now has lungs.
The perception that
the present USD recovery has lungs means that all the speculators camping out
in commodities are having a change of heart about them. Besides, commodities
are more of a speculative play anyway, as these are consumed, and not
necessarily long term ‘assets’. Since they are consumed, they are
susceptible to price pressures that eventually cause them to revert to historic
price levels…particularly if there is the economic weakening we see
today.
Of course gold is a
long term asset, but remember, it is money – and will always reflect
what other currencies are doing. Since the USD appears to have had a major
change in direction, gold naturally will adjust to the new environment and
react strongly to any major sea change in the USD. That is why gold’s
price reactions in the last two weeks have been so strong. The magnitude of
the gold action reflects the perception that the present USD rally is more
than a small bump. As money is coming out of commodities, gold is sold to
cover margins.
Also, the advent of
ETFs caused a lot of new money to come into the metals and commodity complex
and increased the price swings, both up and down.
We have told
subscribers that the USD appeared to be bottoming midterm for the last month,
and that gold and commodities could take quite a hit.
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.
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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