Rather than taking a bystander's position to the weak dollar, the Euro Zone is fighting back. We haven't seen yet how the Fed will react to its lower dollar anti-deflation tool first being propped up and then unseated by the Euro zone.
If they follow the Bush Administration's attitude towards those not supporting US aims, I would assume the Fed will duke it out with the Euro Zone over the dollar's value. Certainly if the Big Boss hears about it, the Fed better be in the fight. "Bring'em on" is the White House's attitude towards such challenges but as we already know it's always someone else doing their bidding. Let's see if the Fed Chairman is up to the US dollar fight or will he simply take flight?
The Dollar
This rally is no long-term reversal of a bear market due to improved economic circumstances. It is a fight between the US and all other non-US dollar linked currencies - primarily the Euro Zone. As such, I will stay with gold and let currency positions be traded by those that enjoy such markets and are skilled at manipulation.
Gold
There is a historical precedent for just this currency event in the 1930s and it was positive for gold. We could well have a repeat of this scenario because of the impact on the bond market produced by this fight. I have outlined to you today the fundamental reasons why the technicals for the US dollar and gold are positive.
Take your choice of formations and send to me what you see by fax for comment. There are two falling wedges here and a triangle plus a box. Gold has broken out of its box and should make $350 on that alone. Now what else do you see?
30 Year Treasuries
Our buddy, "Joe D" sent us another of his great long-term charts today. This time it was the 30 year treasuries carried in the article explaining the dollar and gold's apparent contradiction. Joe D sent us a pictorial argument that contends the top is in for the long-term treasuries on his chart. If the top was not in, then it is only a hairline away.
Treasuries will play a role in the war between the US and the Euro zone so we will be watching them closely from here on.
A top in the US long Treasury market would be the final pillar of a long-term gold bull market. It may be conviction on this event that has resulted in skewing the ratio gold trade which has been short gold shares and long bullion.
In fact, what is left of that trade may well have reversed the order. Regardless, the message that NEM and shares like it communicate to me is that the top is in on long bonds and the five pillars of a long term gold bull market are now in position.
Please click on all charts to enlarge. For additional enlargement, place your cursor at the bottom right of the chart and click in the window that pops up.
Last night about 11 p.m. I checked my email and found a note from Kenny Adams that is quite important. In his message, Kenny asked me on a fundamental basis why his technicals showed a confirmation of the low in the dollar at .9238 for a possible period of three or more months - even if tested, even if breached on the downside - by 100 points.
He also brought to my attention the fact that gold was strong and approaching a confirmed low in this reaction without a confirmed top in the general equities.
Well, Kenny certainly asked the right question but at the wrong time. You know there was no way I was going to bed until I had an answer to this apparent contradiction in terms. That being said, here's what I came up with in the very wee hours of today. Thank you Kenny, we owe each other.
Intervention to depress the value of appreciating currencies against the falling dollar:
There is clear historical precedent from the 1930's for just this currency phenomenon. What is occurring is clear from what I said last week concerning the German leadership in the Euro area. As the US practices a "Beggar thy Neighbor" dollar policy - while comfortable with the depreciating dollar - the appreciating Euro is causing economic pressures in the Euro area industrial sector at the worse possible time.
So just as in the 1930's, it is everyone for themselves. German leadership has called for intervention by all the Euro nations to reduce its value. Rather than seeking to real solutions for their economic problems, today's leaders use deceit and market manipulation to achieve their short term objectives. Just like in the 1930's, all counter-currency nations will and are intervening to protect their currencies from appreciation caused by a falling dollar.
The means of intervention to depress the appreciating euro versus the depreciating dollar:
Where does the Euro support come from you are probably asking? In order to support the Euro, you must sell dollars. The methodology involves buying Euros and selling dollars to increase the value of the Euro. Those dollars are not in a warehouse somewhere neatly sealed in 55 gallon drums awaiting a call from the Bundesbank. The dollars required to buy the Euros are in variable maturity US Treasury instruments earning a return for the Bundesbank.
So the means by which the dollars are produced to fund Euro purchases is the sale of various US Treasury instruments held by Germany's Bundesbank and the use of the resulting dollars from that sale to push the Euro higher. You do not pay Euros for Euros or dollars for dollars when you wish to affect the price.
The end result of the war to maintain the value of appreciating currency units against an inherently weak long term bear market in the dollar, raises US interest rates.
What a web the spiders of Spin City have woven. The reasons for standing by the US in these tough economic times have been severely reduced by the Iraq war, by the inability to produce WMD, by the size of the US current Account deficit, by the pain resulting from the strong Euro and much more. Therefore, in this free-for-all and similar to the 1930s first event of dollar weakness, the dollar may well have a confirmed a bottom and gold will rise alongside the dollar. That is what Kenny is seeing in my opinion.
But what about the Strength of Equities? Please listen carefully tomorrow to the words of the Federal Reserve Chairman. I am not suggesting that they will clear up anything (that's asking a lot), but they have meaning (most hidden) that must be factored into the equation. Also, please review the material I have provided you that clearly points out what the Fed, the Treasury and the Exchange Stabilization Fund can and will do.
Here are the words of Chairman Greenspan on this matter: "The Federal Reserve has unconventional tools to fight deflation and will use them, even if it is highly unlikely that they will be needed. These tools are purchases of government bonds to reduce long term interest rates, intervention to push down the dollar, and buying private securities to push up asset prices."
Long term interest rates can only be supported by buying long term bonds. We all know that intervention to depress the dollar has not been needed up to now. I have published the regulations of the Exchange Stabilization Fund to show you that it can legally purchase securities with no limitations.
A private security could be a derivative that represents a purchase of the S&P or DOW index futures. It is legal. The Fed can provide credit to the treasury which in turn can finance the Exchange Stabilization Fund. I firmly believe that the Exchange Stabilization Fund was largely responsible for last Monday's 200 point jump in the DOW.
But you may ask, "how can gold perform well in this?" Keep in mind that gold under $350 yells deflation to the establishment and above $350 it screams reflation. Gold inherently loves inflation. For the Fed to avoid Zero Bound, it must disavow Zero Inflation as marching orders and set Stable Prices as new marching orders.
It's worth noting that while walking a tightrope between keeping the dollar low and not hurting the bond market, the Fed must set a Stable Prices inflation goal to meet expectations.
Much like in the 1930's, the dollar war now breaking out at best will give the dollar a temporary bottom and some rally ability but it will not support the dollar long term. The US will fight back in the dollar war by simply firing up its printing presses. In that battle, the US will win but at a terrific cost that is long-term negative to the dollar.
As a result of this new "International Weak Dollar War" all combatant countries will eventually produce more of their own currencies, augmenting the process to its inevitable conclusion.
When gold rises faster than any currency that appreciates, all currencies can be considered to be falling in relationship to gold. This occurred in the 1970's and will surely happen again. That is when gold performs the best because it becomes the currency of common choice by default.
Remember the Golden Rule: "When gold becomes a commodity it becomes 'worth less.' When gold becomes a currency its value becomes infinite."
One major building block that's missing from the picture required to sustain a long term bull market in gold was a top in the long term bond market. I believe the equation now supports the reality that a top exists in the long term US bond market.
See the chart that accompanies this piece from our friend "Joe D." A top in long term rates was the only missing criterion for the establishment of a long term bull market in gold which we are in now and will be for many years to come.
Considerações do James Sinclair sobre o ouro e não só...
jota
57
14-07-2003 19:18
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