Monday, June 8, 2009

The U.S. Dollar, Gold and Oil

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The trade-weighted dollar was rallying this morning when European trading opened and gold, silver and oil fell in tandem. Actually it would be more accurate to say that two of its major components the Euro and British Pound were selling off (the Canadian Dollar and Yen were up slightly) after the European Parliament election over the weekend. The British Labour Party received only 15% of the vote and Gordon Brown is now in even greater danger of being ousted from his leadership (or lack thereof) position. Across the pond in Canada a significant quantity of gold, silver and other precious metals is unaccounted for at the Royal Canadian Mint. In the energy markets, the struggle between oil bulls and bears continues to heat up.

The dollar's rise is off of a key support level at 78.33. If you look at a chart of the dollar, you see a very clear head and shoulders topping pattern. The neckline is at 79. Once the dollar reached this level, news reports that would help it reverse its downward momentum started gushing forth from the press. Most can be traced directly to the U.S. Treasury Department and the Federal Reserve. The Fed even intimated that it would start raising interest rates in the fall based on a projection of economic recovery starting then. While there is somewhat less than a zero chance of an increase in Fed Fund rates that soon, the dollar nevertheless rallied on the news.

The Canadian Mint story is something that has received scant if any attention in the U.S. press. Unlike Fort Knox, where the U.S. keeps its gold supply, the Canadian Mint is audited regularly. It has been at least 55 years since Fort Knox has been audited. There have been only a handful of reported thefts by employees at the Mint in the last 25 or so years. Most revealing is the case of a worker that supposedly stole only 85 ounces of gold in 1996. A charge of theft against the man was dropped for unexplained reasons and the mint was spared the humiliation of a trial that would have explained how the man snuck the gold past metal detectors, surveillance cameras and electronic sensors. Perhaps similar things don't happen at Fort Knox, it's not possible to say. It is much more likely that there is less gold there than reported because the U.S. government has sold off more of its gold than it publicly admits. Without an audit, we will never know.

Light sweet crude was as high as 70.32 at the end of last week and closed at 68.44 on Friday. It was at 67.59 in mid-day European trading this morning. The price dropped sharply mid-week, but it strongly rebounded on a Goldman Sachs report that oil would rally to 85 by the end of the year (somehow I suspect that Goldman has a big long oil position). I read this as Goldman will be selling its oil at the Fibonacci retracement around 77. It needs to set a somewhat higher target to be able to get out at that price. Smart traders will follow Goldman's lead and close out their long positions around that price as well.

NEXT: Dollar and Gold, Power Struggle Continues

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

1 comment:

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