Market reversal bells ring as US dollar back to August 2008 low
Posted on 24 April 2011 with 2 comments from readers
The US dollar has been plummeting in value and has now returned to lows last seen in August 2008 just before the eruption of the global financial crisis that autumn. Fears are growing of a repeat of this market reversal.
Currency traders are mindful that when financial markets crash then the dollar will rally as a safe haven and because assets are sold for greenbacks. The also know that currency lows are often seen before major market events. Will it be different this time?
Bernanke goes public
Next Wednesday Fed chairman Ben Bernanke will give his first ever scheduled press conference, after the style of the ECB. All eyes will be watching him for dollar positive or negative statements on the deficit. Will Bernanke have a QE3 up his sleeve or is QE2 the end of this money printing program?
And with the dollar this low markets are bound to be nervous and potentially volatile:
Our friends at Agora Financial report ‘there’s a rumor the People’s Bank of China might revalue the yuan, by as much as 10 per cent’. That sounds a bit far-fetched but then who would have expected the Arab Uprisings of the past few months on New Year’s Day?
Debt hits ceiling
Besides the US is already up against its own debt ceiling before the cut-off date of May 16th that treasury secretary Tim Geithner has been warning about, with the latest national debt total of $14.32 trillion already just above the ceiling of $14.27 trillion.
Only last week S&P set the cat among the pigeons with its warning that the triple-A rating of US debt was now shifted to a negative bias (click here). It is not hard to see why but the risk of a bond market implosion looms higher on the agenda as a consequence.
But with the US dollar trailing at lows not seen since August 2008 and the US stock markets at a 33-month high, the pendulum is surely overdue for a reversal. Even the Vix volatility index is at a four year low, exactly the kind of calm that comes before a storm.
Perhaps we have gotten to a point of perpetual dollar devaluation and an everlasting rally in stocks, but history suggests markets move in waves and not straight lines. The dollar and bonds are overdue for a rally and stocks for a correction.
Gold and especially silver are also ripe for a reversal but this may not be as large as in previous corrections because the demand for precious metals is so high right now. That said the dollar may move lower and send gold and silver still higher before tipping over.
2 Comments posted by readers:
You ask, “Will it be different this time?” and I, in my historical ignorance of financial matters, reply “Yes!”
“Currency traders are mindful that when financial markets crash, then the dollar will rally as a safe haven”. This is historically correct but we are in the era of black swans. And my black swan on this is that the currency traders are wrong this time, and people will not see the dollar as a safe haven.
I suggest that they will sell their assets on a stock market crash and that they will buy silver and gold, at least until the market has reached its lowest point before they buy up cheap stock.
However, once some of these former assets are in bullion, I do not think that all the gold and silver purchased during a market collapse will be sold to buy cheaper stock. Some of the newly-purchased bullion will remain, partly because the dollar is weakening and inflating and partly because for some people it can be difficult to sell, although I suppose ETFs contradict this point somewhat.
Anyhow, with all the uncertainties around the globe, I think that a greater portion of investment wealth will remain in bullion following a market “correction”, and that there may not be a price-fall in gold and silver as you suggest is overdue.
When one says that the “financial market will crash” this implies that operations such as GS will drop in value. If this assumption is correct,then, since GS uses the Federal Reserve for funding; which ultimately means that the taxpayer will be obliged to cover; the US taxpayer will enjoy an increase in the tax debt.
Let me see; this seems wrong somehow hmmm help