Thursday, November 12, 2009

Action Speaks Louder than Words for U.S. 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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One of the three great economic lies of our times is the U.S. has a strong dollar policy (the other two are 'inflation is subdued' and 'the economy is recovering'). U.S Treasury Secretary Timothy Geithner has been repeating this oft stated fantasy at the G-20 meeting last weekend and at the APEC (Asia Pacific Economic Forum) on Thursday. It wasn't reported if either audience laughed at him as was the case in China earlier this year. When a country's stated currency policy becomes a standing joke, you know things are going downhill fast.

There is nothing new about U.S. Treasury Secretaries claiming the U.S. has a strong dollar policy. All of president Bush's appointees ran around the world mouthing the same strong dollar mantra as if repeating it often enough would make it come true. The trade-weighted U.S. dollar is now 37% lower than it was since the beginning of the Bush administration. Things have been even worse under Obama so far. The dollar is down 16% since this March. After eight years of decline, you can't blame people for tittering when they hear the U.S. wants a strong currency. Reality indicates otherwise.

Not surprisingly, gold has been going up since 2001 as the U.S. dollar has fallen. There is no question that there is a strong inverse correlation between gold and the dollar in the long term. While the two move in opposite directions over time, this should not be interpreted as they always move in opposite directions. Even a number of high profile investment experts make this mistake. The dollar and gold can move in the same direction for months or even years at a time. Gold and the U.S. dollar moved together from May to December 2005, May to December 2003 and from 1978 to 1980 when gold had its most spectacular price move up ever. So when someone advises selling gold because the dollar is going to rally, they need to be right about two things. First the dollar has to rally and second gold has to not be in or be entering a period when it is trading in the same direction as the dollar.

There is a lot of talk about the U.S. dollar needing to rally because it is severely oversold. This is indeed the case, but a market experiencing a strong decline gets oversold and stays oversold. The trade-weighted dollar is also not at a strong support level on the charts. It is trading around the 75 level where there is no chart support. There is a strong band of support in the 72 to 74 area, with the all time low somewhat below 72. A test of the all time low is inevitable at this point. The only question is does is happen within the next couple of months or after that.

Disclosure: No positions in the U.S. dollar, long gold.

NEXT: America's Other Deficit - More Borrowing Ahead

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:


The dollars grows weaker by the day.