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Now
that we see the USD rising again over 81 on the US Dollar Index (USDX) the
question becomes will we possibly see 91 USDX sometime in 2010?
Yes
very possibly, and we may see more than that. Let me explain. Since roughly
fall 2007, the US Fed has been creating liquidity and even buying markets
directly (home mortgage bonds for example) then when the US decides to roll
that back, there is USD strengthening as institutions who borrowed Fed money
with bad collateral have to repo the stuff and get dollars to buy the stuff
back (repossess them).
Then,
on top of repo activity starting after the end of March 2010, the Fed stated
they intend to roll back QE (actual Fed buying markets themselves) and this
would be market negative, since half of Fed liquidity infusions in 2009 was
invested directly in markets by banks, instead of lent out. The same goes for
all of China’s stimulus, much of their own stimulus money and huge bank
lending in 2009 went into their property and real estate bubbles.
Then,
the US is on track to raise interest rates this year, after raising the
Discount rate and other measures. China also is on track to raise interest
rates, having raised bank reserve requirements to cushion expected bad loans.
But if the US begins any regime of raising interest rates, the USD will
rally.
If
markets sell off worldwide due to all this monetary tightening here and
abroad (some doubt that will really happen regardless) foreign markets will
start to unwind, and that leads to USD repatriation as money is pulled from
foreign markets and returned to the US. This creates a demand for dollars,
and is USD bullish.
Commodity
markets are peaking, and if they drop that is USD bullish, aside from the
fact that a rising USD is commodity bearish…
Gold
could correct but will stand up better than most things to a rallying USD
because this entire situation (deleveraging) is a flight to cash in general,
a rallying USD is merely the biggest example of that. Gold is THE cash,
without peer.
The
US T market is a huge bubble, but that is tempered by a potential world stock
crash coming after QE ends in March in the US (Ostensibly. Some think the Fed
might just continue it anyway if things are bad) and a bad crash combined
with a rising USD would buttress US Treasuries for a few months.
In
Nov 2009 we called for a USD rally to subscribers when the USD was about 75
on the USDX. It is now over 81. We called the gold bottom in Nov 2008. Gold
rallied the whole year after.
We
have some basic defensive strategies to cover these potential events - a
market crash and a possible Yuan revaluation. In any case we have made some
incredible calls for the last two years on the overall markets, calling huge
swings in the USD, currencies, gold and commodity markets at key times,
predicting trends that lasted 6 or more months out from our calls. There is a
chart showing several of the major ones we called in the last 2 years on our
site. Our newsletter is 44 issues a year with mid week email alerts.
We
invite you to stop by and have a look.
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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