Dance of the Declining Dollar Continues

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.

Our Video Related to this Blog:

The trade-weighted dollar fell below 75.00 yesterday, only seven trading days after it decisively broke 76.00. It is up above 75.00 this morning and should have a short rally at some point soon because it is too far below its 50-day moving average. Any recovery will only be temporary however. Selling pressure seems to never be far away. The short-term rallies have the signature of some form of government intervention. They are sharp, sudden and tend to take place after some support level has been broken and when trading in the U.S begins. Once the intervention money runs out however the dollar just continues its downward drift.

Manipulating a major currency is an expensive undertaking and requires a lot of resources. The size of currency markets is huge compared to the bond market, which in turn is huge compared to the stock market. Direct intervention requires using foreign exchange reserves. The U.S. has almost none of these. Late July figures from the Treasury website indicate that the U.S. has only a net $7 billion in reserves (foreign currency holdings minus short positions). This would be appropriate for a small developing economy, not a superpower. In contrast, China has approximately $2000 billion in foreign reserves. All the big holders of foreign reserves hold large amounts of U.S. dollars. Their intervention in the currency markets would require they buy even more dollars with their other more desirable reserves in euros, yen, pounds or other currencies. This would not be a good deal for them.

Significant intervention to hold up the dollar will be occurring probably next year. There has been a history of such interventions in the post World War II era. Their effect is only short-lived unless the underlying condition that caused the currency weakness in the first place is corrected. In the current case, the U.S. needs to raise interest rates to attract dollar investments. The actual condition of the U.S economy (not the phony PR about the recovery) makes this impossible for the next many months. It is possible though that an extreme drop in the dollar may force the Fed's hand next spring.

Whether the dollar just continues its slow agonizing fall, which has become a fixture since the U.S. left the gold standard in 1971, or whether there are some serious short term declines (this happened through devaluations in the 1970s) remains to be seen. This fall may be the first time one of these sharp, sudden drops takes place.

NEXT: In for a Penny, In for a Pound

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.

IMF Selling Gold to Dampen Rally

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.

Our Video Related to this Blog:

Like clockwork, the IMF gold sale has reared its ugly head again as has occurred during a number of previous gold rallies since 2007. This time the IMF is actually selling the gold. It only threatened to do so the previous six times or so. It says it is looking for a central bank buyer. For some time, rumors have claimed that the central bank buyer will be China and these resurfaced again last week before the IMF announcement. China is playing coy however and says it wants the gold at a discount to the current $1000 price. Other possible buyers include Russia, the Gulf Oil States, Japan and India, all of whom have relatively low gold holdings and too many U.S. dollars.

The IMF is selling one-eight of its claimed gold holdings (the IMF is not audited, nor will it answer questions about whether its gold is held in individual contributing countries and being double counted as part of their gold reserves) or 403 metric tons. While this sounds like a lot, its is less than $13 billion at current prices. China alone has approximately 2000 billion dollars in reserves held in foreign currencies, almost half of which are in U.S. dollars. China's current gold holdings are 1054 metric tons, up from 400 metric tons in 2003. So it has less than $33 billion in gold versus almost 1000 billion in U.S. dollars. It is thought that the gold sale is being used as a way to let China get rid of some its U.S. dollars without dumping them on the open market.

There is also a two-day Fed meeting this week on Tuesday and Wednesday and a G20 meeting this Thursday. Since the Credit Crisis began two years ago, the U.S. dollar has rallied from just before the Fed meeting to just after (gold falls in response). This has happened no matter how much the Fed has announced it is debasing the currency. No one in their right mind would buy dollars under such circumstances, which leads to the obvious conclusion that global monetary authorities are acting in concert at these times to hold the dollar up. Expect this again this week. As mentioned in this blog on Friday, the dollar is too extended from its 50-day moving average and will try to rally back to that point.

Gold has traded as low as $996 this morning and the trade-weight dollar is at 76.97 at the moment (still below its 78.33 break down level). Expect general weakness in gold and the other precious metals and strength in the dollar until Thursday. A reversal for both after that is highly likely. Keep an eye out for buying opportunities, particularly in the mining stocks.

NEXT: Manipulation Fails, Gold Rallies Back

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.