Dollar bears could be surprised on the upside
Posted on 24 December 2008 with no comments from readers
There is a growing consensus in the foreign exchange markets that the dollar’s rally is over and that we are heading for a resumption of dollar weakness. But hold on before you place your bets.
It seems pretty clear that what drove the dollar recovery was the stock market sell-offs of this autumn. Investors sold in foreign markets and bought treasuries. Investors sold in US markets and bought treasuries. This represented a liquidation of paper assets by those fearing a further market fall and hedge funds which had no choice.
Dollar rally
Eventually sellers were sold out and a few buyers returned for the ‘bargains’ and the dollar recovered, partly because many other currencies looked expensive given their own bankrupt economies.
Now what is the immediate future in capital markets? Will hedge funds be net buyers or seller in the New Year?
No there is going to be a massive fresh liquidation of hedge funds on the back of year-end redemptions. The sensational $50 billion Madoff scandal will give added impetus to this sell-off.
As as we found out – much to everybody’s surprise – in the past autumn a big sell-off is positive for the US dollar. So would it not be reasonable to suppose we are in for more of the same?
Dollar fall
That is not to say that the monetary inflation now in the pipeline from stimulus packages, bailouts and quantitive easing will not eventually result in a run on the dollar, and a crash in the bond market. But this is still in the future, and in foreign exchange markets where billions change hands every second, that is an important consideration.
Of course, I could be horribly wrong – like everybody who thought the dollar would continue to weaken this year. Trust the professionals if you like. Nobody is paying me to write this blog. If I could offer one piece of advice for 2009 that is to think for yourself and trust nobody. Treat my remarks skeptically too!
However, personally I remain hedged with both dollar currency equivalents and a precious metal portfolio. This is a defensive liquid position and I can not see why you would hold anything else until markets have clearly established a new bottom.
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Clive Maud’s New Year message is a reminder why I would also keep money in precious metals now…
The way things look it will soon be impossible – or very difficult and expensive – to obtain physical gold and silver. The first major wave of physical buying has bought up all of the coins and small bar gold and silver available on the market, with the result that if you want any, you must pay a large premium. Right now, the second wave is underway, with astute investors forcing the Comex to deliver, which is having the effect of drawing down their warehouse stocks at a rapid rate. As the Comex is massively leveraged and trades hundreds of times more gold and silver than it has in its possession, it is clear that immediately their warehouse stocks are completely depleted, there will be a mad scramble to buy physical gold and silver in order to meet contract obligations. This will light the fuse under the Precious Metals sending them into the stratosphere – and gold and silver have plenty of other reasons to go up anyway, apart from failure of the Comex. On Jim Sinclair’s jsmineset website the battle to overcome the stranglehold of the Comex is portrayed as a David and Goliath contest, with all the little guys banding together to overcome the big bad Comex. The reality however is that the little guy usually wins when he aligns himself with big money, and you can bet that if gold is going to go up alot, big money is going to get a sizeable slice of the pie, as usual. This is actually good news for goldbugs, for ahead of a major upside breakout big money will move in and grab a huge chunk of the pie and it will be this that steamrollers the Comex into oblivion. So watch for some powerful players demanding delivery going forward.
It is therefore most important when reviewing the charts for gold and silver, which are for the paper market, that we take into account the implications of the rapidly tightening physical market. For right now the charts are deceptively flaccid and lacklustre, although on closer inspection we can see that even the paper market is firming up in readiness for something big. The key point to grasp is that immediately all of the physically available gold and silver has been bought up, prices are set to rocket, and that must include the paper Comex price, unless the Comex wants to stand idly by and watch a flourishing black market that will have the impetus to foster the creation of another exchange in another country if they don’t want to play ball.