Long dollar, short oil, hold gold?
Posted on 05 July 2009 with no comments from readers
If you hold that the bear stock market rally is over, or almost over then shorting oil and going long in the US dollar is a logical step.
Oil and the US dollar move in lock-step: weak dollar, strong oil price; strong dollar, weak oil price. Just look at what happened last year: a weakening dollar drove the oil price to a $147 peak last July; then in the financial crash of the autumn everything was sold for dollars, pushing up the greenback, and oil prices dropped to $32 by December.
Oil price high
This year we have seen dollar weakness again and the oil price went up to a high of $73 last week. Is this about to unravel now, with renewed stock market weakness rallying the dollar and knocking the stuffing out of oil prices?
That much could be fairly obvious after the big stock market sell off at the end of next week, and the fall in the oil price to $67. The big question is whether this market correction becomes a new directional trend.
Readers of this financial website will know what to expect next as an argument. We have just gone through a massive bear market rally in stocks, and yet economic fundamentals are arguably still worsening, if not actually going down as fast as earlier this year.
Therefore, the stock market must correct to a less optimistic outlook. Or will it? The pattern of previous big bear market rallies is for a modest correction to be followed by a brief but spectacular blow-off before a real downturn. We do not appear to have seen that final blow-off yet.
New trend?
On the other hand, if market participants can come back down-to-earth for a moment and consider where this is all heading then they might get a very useful pointer to the outlook for the US dollar and oil.
For if the markets are being set up for something resembling a second installment of last autumn’s drama then that will mean a sharp fall in the oil price – perhaps below $25 – and a rally in the US dollar. That might also be bad for the gold price but with inflation fears growing it might be a beneficiary of the flight to safe haven assets, and perform even better than last autumn as a preserver of wealth.
So go long dollar, short oil and hold gold?
no Comments posted by readers:
A piece of well-written analysis.Nowadays everything which carries a price over their heads and trad able in market are unpredictable,can we blame all these on the fallible USD?
Asking the US to come to its sense by devaluing its currency and let go its dominance is insane.BRIC is just doing its due justice to the rest of the world, by suggesting a system of secured major currencies for the world ,and this is not going to happen overnight,it would be a painful process.Just imagine the declared US public and private debt has shot up to a snow balling of more than USD 53 trillion,asking the American to continue to consume goods and service as usual is equally insane as well.
I do not see any magical formula to the woe, let alone the combined political will of BRIC. The sooner BRIC can come to term of a new system monetary system to replace the sole dominance of USD,and on the other hand,create a climate for the USD to depreciate to its sustainable level,the international currency crisis shall see light at the somepoint of the tunnel, and this is good for USD trimming and a the birth of a combined or alternative major currencies to bring back stability to the international monetary system .Otherwise every countries and every inhabitant of the world shall continue to suffer and the culprit bring down every one when it sinks to the bottom;by sharing its dominance with other currencies,the USD is justified to sink and swim with the rest,thus paving the way for a less painful post USD dominance era.
Which is the better and less destructive option? for both the US and the rest of the world?