Central Banks Support the Dollar

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

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The U.S trade-weighted dollar had an explosive rally on Monday. The rally was by no means even during the day, but consisted of a few sharp rises that lasted only minutes. Not much happened in between. Only central banks have enough capital to account for this type of trading pattern. Not all currencies moved equally against the dollar either lending further credence to central bank intervention having taken place. Only the euro and Canadian dollar had significant moves down with the Australian dollar having a lesser drop. The Yen hardly budged. The British pound actually rose slightly on the day. Care to guess which central banks might have been involved?

Gold and silver had sharp sell offs in reaction. However this was not the only reason that accounted for their movement down. There is an options and futures contract expiration tomorrow. The same expiration affects natural gas, which also had a sharp sell off, but this was only tangentially related to movements in the U.S. dollar. The dollar intervention was clearly timed to get maximum bang for the buck (so to speak) and drive down the price of gold as much as possible. There was no technical damage on the gold and silver metals charts though. Silver partially filled a gap from the breakout earlier in the month and probably needs to trade to the bottom of the gap before it can resume its movement upward.

A number of gold and silver miners also filled their equivalent gaps from the same day in early October. GDX, the precious metal mining ETF did so and traded down to its 50-day moving average. Technical problems are showing up on a number of miner's chart however, so this sell off is probably not over. Novagold (NG) has serious problems on its 15-minute chart which indicate a lower low is quite possible in eight to ten days. A rally in the middle is likely. You might want to consider a tight stop. Buying on the dip is another option. Silver stocks like Hecla (HL) and Coeur d'Alene (CDE) are interesting possibilities. Hecla still has an unfilled gap lower down (as do a few other mining stocks). Look for the gaps and keep an eye on them before deciding to buy.

While currency intervention is keeping the U.S. dollar from collapsing, it will have a high cost over time. Everything sold off yesterday and that includes U.S. treasury bonds. When bonds go down, interest rates go up. There was a minor breakout in the 10 and 30 year bond interest rate charts Monday. The stock market is exceedingly vulnerable in here as well. The rally has been based on liquidity and the movement of that liquidy out of stocks into the dollar could damage stock prices considerably. This is the choice the monetary authorities are facing - save the U.S. dollar or save the stock market and keep interest rates low. Knowing how competent Ben Bernanke is, it will probably be none of the above.

NEXT: Markets Enter Danger Zone

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21



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.