Posts Tagged ‘us dollar’
Fed’s Currency Swap Lines: A BIG deal for the Dollar
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The Fed met this week on monetary policy. It was a bit of a snoozer. What wasn’t a snoozer, however, was what they’ve included in their recent monetary policy statements regarding currencies.
Most market participants have been entranced by the Fed’s language about their target interest rates …
Will they say they’ll keep rates low for an “extended period” or not?
But the real story was buried in the last paragraph of the December Fed statement and reiterated in their latest statement.
Here’s what it said …
“The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1.”
Following the Fed’s statement this week, there was a coordinated release of comments from the European Central Bank, the Bank of England and the Swiss National Bank confirming that the swap lines were no longer needed.
For the currency markets, this is a big deal. Yet, few have thought the juicy details of the Fed’s plans on currency swaps are of interest.
But I do. I suspected it was a game changer for the dollar when I was studying the statement last December. And so far, the price action in the currency markets is confirming that.
Here’s a bit of background …
In September and October of 2008, the Fed announced that it would be opening temporary currency swap lines with central banks around the world in fixed amounts through April of 2009. As that expiry date neared, the Fed extended the period to October, and then extended it again until February of this year.
Here’s what that means: The Fed agreed to give foreign central banks U.S. dollars at a determined exchange rate for the currency of the respective foreign counterpart. And when the swap ends, the two central banks simply repay the same quantity of currency back. There’s no exchange rate risk and no impact on the demand for currency in the open market.
Why Did the Fed Offer Dollars to the Rest of the World?
When the credit crisis was at its peak, banks around the world were hesitant to do any short-term lending with other banks. As a result foreign bank-to-bank lending rates for dollars, the world’s primary business currency, shot up. That restricted access to dollar borrowing and pushed a lot of consumer interest rates higher in the U.S. and abroad.
By providing these currency swaps with other central banks, the Fed helped to inject dollar liquidity into banks around the world. And it was well needed.
In short, it was good for the global financial system because it helped reduce the fear premium that was causing market interest rates to soar.
You can see this clearly in the chart below. In panel A, while the Fed and other central banks were cutting benchmark interest rates to the bone (the white line), the Libor rate (the orange line), or the rates at which banks make short term loans between themselves, was going in the opposite direction.
Subsequently, when the dollar swap lines were rolled out, you can see in panel B how this divergence was reversed.
The Implication for Currencies
Most importantly for currencies, what these currency swaps did was increase the supply of U.S. dollars in the global markets — a negative drag on the value of the dollar.
So with the Fed announcing that it will close its currency swap lines with foreign central banks by February 1, the unlimited access to dollars by foreign central banks has come to an end.
This development is easily a positive for the dollar.
Let’s take a look at the timeline of these developments and the respective performance of the dollar …
As you can see from the chart, following the Fed announcement that the swap lines would be extended through October, the dollar has gone through a period of decline. Since December, when the Fed announced these facilities would be ending in a little more than a month’s time, the dollar has been on the rise.
When they opened these massive swap lines in late 2008, the goal was to alleviate the dollar liquidity crunch at banks around the world. However, in the process they increased the supply of dollars around the globe — a negative consequence for the value of the dollar. But now that these lines will be closed, it’s clearly a dollar-positive development.
And with the weight of evidence leaning in favor of the dollar at this stage, as I laid out here in my article last week, this latest announcement by the Fed provides more reason to believe in this dollar rally.
Regards,
Further Downgrade in Greece Triggered Credit Concerns, Investors Sheltered under USD
Broad-based rally in USD pared commodity gains made Wednesday. The dollar surged to 1.434, the highest level in 3 months, as S&P downgrades Greece’s credit rating for the second time this year.
Commodities pulled back as strength in the dollar reduced demand. WTI crude oil price retreated to 72.6 after surging to as high as 73.55. Comex gold also dropped to 1136 from 1142.5. Commodity currencies also tumbled. The Australian dollar plunged to 0.887, the lowest level in more than 2 months, while the New Zealand dollar slipped for the 3rd day to 0.71.
After placing Greece’s long-term rating on Credit Watch for a week, S&P eventually decided to downgrade it to BBB+ from A-. According to the agency, ‘the downgrade reflects our opinion that the measures the Greek authorities have recently announced to reduce the high fiscal deficit are unlikely, on their own, to lead to a sustainable reduction in the public debt burden’. The downgrade also made S&P’s rating consistent with that of Fitch which downgraded Greece to BBB+ on December 8. However, they may not be the end of the story. Greece remains in S&P’s Credit Watch, suggesting further downgrade is possible.
Risk aversion increased and shifted from higher-yield assets for USD, Japanese and bonds. Stock market also declined. In Asia, the MSCI Asia Pacific Index lost -0.9% as driven by financial companies. Concerning individual indices, China’s Shanghai Composite Index lost -2.3% while Japan’s Nikkei stock average lost -0.1%.
In Europe, all benchmark indices opened lower. In UK, the FTSE 100 Index slid -1% while both of Germany’s DAX and France’s CAC 40 fell around -0.8%.
On the macro data front, UK’s retail sales surprisingly dropped -0.3% mom in November, following a +0.6% increase a month ago. This was the first monthly decline in 6 months and suggested economic recovery in the country remained choppy.
Later today, Canada will report November’s CPI which probably rose +0.3% and +0.8% on monthly and yearly respectively. Over +5% increase in gasoline price in November, as well as potential increase in auto sales price, should have pushed price levels in the nation.
In the US, initial jobless claims probably declined to 466K from 474K in the previous week. Moreover, leading indicators are anticipated to have risen +0.7% in November after an increase of +0.3% a month ago.
Source: oil n gold
What Could Lift the Dollar?
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The most recent employment data in the U.S. came in significantly better than what was expected. And the financial markets reacted in a different way this time. Interest rates went screaming higher, the stock market surged, gold fell and the dollar shot up.
In a normal environment a stronger dollar following better U.S. economic data sounds perfectly reasonable, but in the current “risk-centric” environment good news has been bad news for the dollar. That’s because it has emboldened risk appetite, which has translated into investors selling dollars in exchange for higher yielding/higher risk currencies.
This time the improving data gave investors the idea that the Fed could begin reversing its zero interest rate policy sooner. That got the dollar moving higher. And that got the wheels turning for a bounce in the weak dollar trend.
The dollar has continued to show strength following that turn in sentiment, but the prospects of a sooner move on rates has now been dismissed. The knee-jerk reaction in the markets that priced in an earlier hike in rates was subsequently fully reversed.
What is now underpinning dollar strength is a shift in market focus toward some of the headwinds facing the global economic environment. That’s swinging the risk appetite pendulum back toward safety, which is positive for the dollar.
So what can keep this momentum going in the dollar?
Answer: Growing risks to the global economy.
Let’s take a look at some of the specific catalysts that could fuel more demand for dollars …
Catalyst #1: Rising Prospects of a Sovereign Debt Crisis
First it was Dubai that stoked fear in the financial markets over the Thanksgiving Day holiday. Now, Greece has been called on the carpet over concerns that the nation will struggle to meet debt commitments. Fitch downgraded Greece to just three notches above the lowest investment grade status.
Debt problems in a global crisis have the ability to be contagious. And that can destroy investor confidence in the capital markets of such countries, and in the global economy. And when confidence wanes, capital flees. That’s a recipe for falling dominoes.
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| First it was Dubai that rattled the markets. Now Greece’s debt has investors worried. |
Catalyst #2: Problems for the Euro
The recent downgrade in Greece turns the market focus back to the problems that exist in the Eurozone, and that’s putting downward pressure on the euro … which means upward pressure on the dollar.
The European Union’s growth and stability pact limits all member countries to a budget deficit of 3 percent of GDP. But Greece is running a budget deficit of 12.7 percent of GDP, over four times the limit.
In fact, on average, the 16 member states of the single currency are running a budget deficit more than twice the 3 percent limit!
So the uneven performance in Europe will likely call into question the viability of the euro currency again. Another bout of speculation of a break-up of the euro is hugely dollar positive.
Catalyst #3: Growing Uncertainty Surrounding Economic Recovery
Now that sovereign debt problems are surfacing, investors are getting concerned about the sustainability of this recovery. After all, the unprecedented global fiscal and monetary response was an experiment. The outcome is unknown. And the underlying problems related to the crisis still exist: Bad debt, reduced wealth and tight credit to name a few.
Moreover, when you answer a liquidity crisis with more liquidity, you’re bound to create more bubbles. While ground zero for the credit crisis was the U.S. housing market, new bubbles in real estate are developing in the areas that were relative outperformers in the downturn (such as China, India and Canada).
In Shanghai, housing prices were up 40 percent in October from the same period a year earlier. And in a story about the Canadian housing market this week, Bloomberg quoted a real estate agent as saying, “Where else in the world do you have agents lining up overnight to buy a condominium?”
To someone here in the U.S., that sounds familiar.
Catalyst #4: Protectionism
We’ve already seen evidence of restrictions on global trade and capital flows. Considering protectionism was a key accomplice in fueling the Great Depression, this activity represents a major threat to global economic recovery.
After the lessons from the Great Depression, the leaders from the top 20 countries of the world vowed to avoid protectionist activity. But actions from the G-20 countries are speaking louder than words. New trade restrictions have been erected by most of them since the pledge was made.
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| Trade restrictions could derail global economic recovery. |
Perhaps the biggest factor in the protectionism threat is China’s currency policy. Even after recent tour stops in China by U.S. President Obama and European Central Bank President Jean-Claude Trichet to lobby for a stronger yuan, the Chinese have remained steadfast on keeping their currency weak. As this issue with China’s currency gains in intensity, expect protectionist acts to rise in retaliation. And expect collateral economic and political damage.
Bottom line: If sovereign debt problems and the prospects of a double dip grow, you can expect investors to pull in the reins on risk. And this time, they might not be as eager to turn the risk appetite switch back on. That could give the buck a strong lift … a lift that might last longer and rise further than many expect.
Regards,
Arab States to Ditch U.S. Dollar-based Oil Pricing
Associated Press
Tuesday, October 6, 2009
The dollar fell Tuesday towards year lows against the euro and the yen after a report that Arab states and other countries were contemplating an end to the U.S. currency’s role in the pricing oil.
By early afternoon London time, the dollar was down 0.5 percent at 89 yen, while the euro was up by 0.6 percent to $1.4729.
Further sustained falls could see the dollar fall below its multi-year low of 87.11 yen, and the euro break above its two-year high of $1.4842, achieved last month. Story continues below ?advertisement | your ad here
The selling was stoked by an article in Britain’s “Independent” newspaper from respected journalist Robert Fisk.
Citing unnamed Gulf Arab and Chinese banking sources in Hong Kong, the article said ‘secret’ meetings were taking place between Arab states, China, Russia, Japan and France, to end dollar dealings for oil and moving instead to a basket of currencies, including the euro, the yen and the Chinese yuan.
Officials in several countries either denied talks or said they had no knowledge.
Kuwait’s oil minister, Sheik Ahmed Al Abdullah Al Sabah, said there have been no talks on the topic among Gulf oil ministers. “At our level, no,” he said. “I didn’t even dream about it.”
Feeding skepticism
Despite the denials, the report fed market skepticism about the U.S. currency in favor of the euro and the yen as the dollar’s future as the world’s reserve currency continues to be openly discussed.
Last week, figures from the International Monetary Fund showed that the dollar’s share of total reserves has fallen to its lowest level since 1995. Meanwhile, Robert Zoellick, a former U.S. trade representative who now heads the World Bank, warned that the currency’s status as the world’s leading reserve currency should not be taken for granted.
“Some stories will run and run and this morning’s report regarding a possible replacement of the dollar as the exchange currency for oil is another chapter in the plot against the dollar as the world’s most dominant reserve currency,” said Jane Foley, research director at Forex.com.
The worries are in part based on much larger U.S. budget deficits and expansive monetary policy at the Federal Reserve, including rock-bottom interest rates and expansion of the money supply. Those are all policies that can undermine a country’s currency.
The dollar’s role as a reserve and pricing currency supports its value because it obliges governments and companies to hold or obtain dollars.
Bank of New York Mellon currency strategist Neil Mellor said the notion that Gulf states may look to reduce their dependence on the dollar is “potentially very significant indeed,” particularly as they share the dilemma with China over the value of their dollar holdings. Any move that undermines the dollars’ value would reduce the value of those extensive holdings.
‘Not even serious’
Over the last five years, the dollar has broadly fallen against many of its main competitors, leading to calls in dollar surplus countries, such as China and the Gulf states, for a greater diversification in their currency reserves.
As a result, talk of the dollar losing its price function is nothing new — in 2003, Russia moved its ruble peg to a two-currency basket of the dollar and the euro. During the oil price boom in recent years, Russia built up big dollar reserves because of its status as one of the world’s major producers.
Dimitry Peskov, spokesman for Russian Prime Minister Vladimir Putin, dismissed the newspaper report as “not even serious” but did reiterate Russia’s recent policy of multiplying the amount of reserve currencies “to ease the burden on a single world currency and save ourselves from another crisis.”
Meanwhile, China has taken stakes directly in energy and commodity producers in an attempt to diversify its dependence on the dollar.
Hans Redeker, global head of foreign exchange strategy at BNP Paribas, said Saudi Arabia, which has the biggest oil reserves, will be the key country when discussing which currencies oil should be factored in.
“What investors should not forget is that Saudi Arabia has an interest to keep the U.S. strong and involved in the region,” he said.
“Switching the dollar for a basket of currencies for commodity factoring would weaken the U.S. additionally, which would be against the interest of Saudi Arabia,” he added.
SOURCE: http://money.cnn.com/2009/10/05/markets/thebuzz/index.htm?section=money_markets.php
World Bank Says U.S. Dollar Not the Only Reserve Currency Option
By Glen Somerville
Market Watch
World Bank President Robert Zoellick said the United States should not take the dollar’s status as the world’s key reserve currency for granted because other options are emerging.
In excerpts released on Sunday from a speech that he is to deliver on Monday, Zoellick said global economic forces were shifting and it was time now to prepare for the fact that growth will come from multiple sources.
“The United States would be mistaken to take for granted the dollar’s place as the world’s predominant reserve currency,” he said. “Looking forward, there will increasingly be other options.”
Zoellick said that a meeting of Group of 20 rich and developing countries in Pittsburgh on Thursday and Friday had made “a good start” toward increased global cooperation but they will have accept global monitoring of their activities.
“Peer review will need to be peer pressure,” he said.
Zoellick said that the G20, as the new chief forum for international economic cooperation, also must not forget the 160 countries left outside its structure and should try to open opportunity for them.
“We need a system of international political economy that reflects a new multi-polarity of growth,” Zoellick said. It needs to integrate rising economic powers as ‘responsible stakeholders’ while recognizing that these countries are still home to hundreds of millions of poor and face staggering challenges of development.”
SOURCE: http://www.reuters.com/article/ousivMolt/idUSTRE58Q1YU20090928
Sprott Says Gold Price Driven by Crumbling U.S. Dollar
By Lawrence Williams
MineWeb
In its latest statement on global markets Canada’s much respected Sprott Asset Management points to the ever increasing doubts on the status of the U.S. dollar as the world’s reserve currency and that it has positioned its hedge and mutual funds heavily in the precious metals sector. “At the end of the day” Sprott says, “when the world finally realises what the US has done to the world reserve currency, international investors will shift into an asset that no government can print. In our opinion the US dollar’s status as a ‘port’ in the financial storm has officially come to an end.”
Meanwhile Reuters reckons that markets are starting to think that a necessary rebalancing process of world currencies, as implied by President Obama in a statement that he will push world leaders for a new global “framework” in which the United States would cut its huge trade and budget deficits, may start as soon as this week’s Pittsburgh G20 summit.
Sprott feels that the U.S. has little scope for getting out of its current financial crisis other than by printing more money and thus effectively devaluing the dollar further. Other options, as listed by Sprott, are just not politically acceptable, or impossible to implement at the present. These are to:
- Default on Medicare promises. (Unlikely given the current debate in Washington to expand medical coverage.)
- Default on Social Security promises. (Unlikely given the increasing average age of the voting public.)
- Put forward a credible plan to balance the budget. (Unlikely given the most recent budget projections.)
- Default on outstanding debt. (Unthinkable).
Already there is much comment from nations with large dollar holdings over the status of their reserve holdings. China in particular has been particularly vociferous on this matter with calls for a new reserve currency made up of a currency basket, and ominously for the dollar it is a position taken up by a number of other nations already. Also positive for gold, are the implications that China may be looking to build its gold holdings to replace some of its reserve dollars. Indeed there are reports that China is trying to get out of dollars as fast as it can by using its huge dollar surpluses to invest in western concrete assets, and not least in securing commodity supplies for its burgeoning industrial growth – and some reports it is accelerating its investments to use up as many of its U.S. dollars as possible before it goes into freefall.
Now this view may well be an exaggeration, but there’s little doubt that the more money the U.S. prints under its quantitative easing programme, the more under pressure the dollar is likely to become in the long term, and the more this is likely to increase gold and silver prices – as well as other dollar-priced commodities – but while other commodities also need a continuing growth in industrial demand to maintain their global value – not just their dollar value – gold can be cushioned from this necessity and can grow in value in real terms if countries increase their gold holdings to support their own currencies. This would not be a return to a gold standard – we have probably gone way too far down the path of monetary excess to be able to do this without a huge gold price increase. The world is probably not ready for that – yet.
But also remember too that gold has been an excellent wealth protector over the past year. True many other commodities have outperformed gold in recent months, but still virtually none are back to their pre-crash levels, their prices having been decimated before making some kind of recovery. Gold is, of course, above its immediate pre-crash levels demonstrating its safe haven value through a major financial crisis.
And there is no guarantee that there isn’t another financial crisis yet waiting in the wings for us. The perceived recovery to date could yet be vulnerable if consumption does not pick up. A recovery built on perception and hype will not last, it needs some more concrete growth signs to be sustainable. There are signs that China, which almost singlehandedly supported global commodity demand, in the first half of the year may be flagging a little. While there are only small signs of any industrial recovery in the west. There are plenty of economists out there who feel that maybe the current market increase may last into next year – and then collapse again.
With the investment sector having been badly caught out in last fall’s meltdown, there are plenty out there sufficiently unsure of the future to retain substantial investment in gold and thus help underpin the price around current levels. If, indeed, China is also supporting the gold price as some affirm, then the only way is up, but perhaps not as fast as some might hope. Gold is still seen, therefore, as a positive insurance against another market crash.
So what are the pointers to look out for? Over this past weekend the confirmation that the Executive Committee of the IMF has, as expected, agreed the sale of 403.3 tonnes of gold – which could even start next week. What was the reaction of the gold price? It rose as the dollar fell – surely a signal that the bogeyman of Central Bank (or IMF) sales is now behind us. Rumours persist that China will soak up any gold that comes onto the market.
In terms of the gold price it has been up above the $1,000 an ounce mark for almost two weeks now. Any forays back below this level have been shortlived suggesting that the market is at least for the time being supporting the $1,000 level as a floor. The trend is looking to be upwards, but perhaps more cautiously than some observers would have predicted. Much will in the short term depend on the dollar, but this looks to be in a downtrend, which is again supportive of gold.
Overall the portents look good for gold . September is traditionally a strong month for gold , but October may bring nervousness. If gold survives this then last year’s record price level, at least in dollar terms, is vulnerable and may itself provide a new floor going into the tail end of the year.
SOURCE: http://www.mineweb.com/mineweb/view/mineweb/en/page33?oid=89649&sn=Detail
U.S. Dollar’s Days are Numbered as Reserve Currency
By Jessica Mead
City A.M.
Thursday, September 24, 2009
Over the next two days, world leaders gathered at the G20 summit in Pittsburgh will attempt to address the issue of the persistent global imbalances that have been cited as a long-term cause of the recent economic downturn. Integral to this debate has been the long-standing issue of the US dollar’s hegemonic status as the world’s reserve currency – IMF data shows that nearly 65 per cent of allocated foreign exchange reserves were held in dollars in the first quarter of 2009.
The dollar’s reserve currency status allowed the US government to build up its current account deficit from just $11bn back in 1998 to as much as $60bn a decade later without being under the same compulsion as other countries to undertake the necessary macroeconomic or exchange-rate adjustments to bring their deficit back under control.
The dollar’s hegemony has come under fire from a number of quarters over the past year, most notably from the Chinese – themselves holding $2 trillion in FX reserves as of June 2009. Ahead of the G20 summit held in London last spring, Zhou Xiaochuan, China’s central bank governor, said the desirable goal of the international monetary system is to “create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.
The Chinese have pointed towards using the International Monetary Fund (IMF) Special Drawing Rights (SDRs) as an alternative world reserve currency to the US dollar. SDRs were created back in 1969 as a means of supporting the Bretton Woods fixed exchange rate system.
The value of an SDR is based on a basket of four key international currencies – the dollar, the euro, the yen and the pound – which can be exchanged for freely usable currencies. The third ever allocation of SDRs was approved on 7 August for SDR 161.2bn – currently equivalent to about $317bn – and which took place on 28 August to pump more liquidity into the global monetary system.
Furthermore, the United Nations Conference on Trade and Development (UNCTAD) called earlier this month for a new currency to be established to protect emerging markets from the “confidence game” of financial speculation.
But while China might be calling for a greater use of SDRs, Nouriel Roubini, professor of economics at the Stern School of Business at New York University (and the man named Doctor Death for his gloomy pronouncements before the financial crisis), says that the Chinese government is paving the way for the yuan’s ascendance. He goes further, arguing that China is in fact better placed than the US to provide a reserve currency for the 21st century thanks to its large current account surplus, focused government and the fact that it lacks many of the economic worries that have plagued the US.
Even the US Treasury’s economic and financial emissary to China, David Dollar, has argued in the past month that it makes sense for China to diversify its huge stockpile of foreign exchange reserves, saying that it is healthy to have a wide and different type of reserve currencies.
While some diversification into euros and sterling has occurred over the past 10 years, the US dollar has lost very little ground. Back in 1999, countries held 71 per cent of their allocated foreign exchange reserves in dollars, and just 18 per cent of reserves in euros. Today, 26 per cent of allocated FX reserves are in euros.
But while many are calling for an end to the dollar’s supremacy and for countries, especially in emerging markets, how likely is it that the dollar will be replaced a global reserve currency?
REPLACEMENT
Mark O’Sullivan, director at Currencies Direct, says that while it would be ideal to find a replacement for the US dollar, he can’t see what it would be. “At the end of the day 65 per cent of the world’s commodities are still priced in dollars and until you change that dynamic, you won’t see an end to the US dollar’s reserve status,” he says. Furthermore, the vast majority of international contracts and invoices between multinational companies are priced and accounted in dollars. A change to the dollar’s status would require an eventual change to this practice.
O’Sullivan says that in order to see a shift in the dollar’s status, the Chinese need to come to the table and make the yuan fully convertible. The Chinese might have been complaining that the dollar is too powerful, but they need to allow central banks to hold the yuan in reserves.
But while the Chinese might be hoping to diversify their foreign exchange reserves, it is going to have to be done very slowly indeed. As Richard Turner, FX sales dealer at spread betting firm IG Index points out, given that the Chinese have a trillion dollars worth of US dollars, they aren’t going to want to drive down the value of their reserves by selling large amounts of dollar-denominated assets.
Even if the yuan could not become a world reserve currency, it is sometimes suggested that it could take that role in Asia, especially among countries which trade with China. Other regions could also follow suit: the Economic Community of West African States plans a common currency, although plans were recently put back until 2015.
The euro is the obvious choice for EU countries, while the rouble could do the same job for Eastern Europe. In a world with many economic powerhouses, it might make sense for there to be a number of different reserve currencies. For now, the dollar is still top dog, but radical changes could be afoot.
SOURCE: http://www.cityam.com/markets-and-investments/x88ril6kcs.html
Gold & US Dollar Relationship
When it comes to Gold, there is actually too much focus or incorrect focus on the US Dollar. The fact is that throughout this bull market, Gold has been leading the US Dollar. In other words, the breakouts in Gold occur well in advance of the breakdowns in the dollar. Also, bottoms in Gold occur in advance of tops in the dollar. See the chart below.
Just take a look at this year! The peaks in Gold and the dollar occurred within days of each other! The bottom in Gold occurred four months prior to the top in the dollar.
A falling dollar is not necessarily a good thing for the leverage in gold shares. In this chart, I compare the HUI/Gold ratio to the US Dollar (inverted). We can see that the dollar significantly lags the HUI/Gold ratio. By the time the dollar starts to fall (rise in the lower chart), gold shares have already gained materially against Gold.
There are two reasons why a falling dollar isn’t necessarily positive for gold shares. First, many gold companies operate outside of the USA. A falling dollar means stronger local currencies, which means higher costs. Second, after a while a falling dollar creates cost inflation, which ends up hurting the margins of gold companies.
Conclusion
A significant breakdown in the US Dollar will come AFTER a major breakout in Gold. Gold has been consolidating for months, even as the dollar has trended down. The recent bottom in the greenback confirms that Gold is still in a consolidation phase. In March we asserted that Gold wouldn’t break 1000 because money would pour into stocks and commodities, thereby diverting Gold’s strength.
Gold’s relative strength has been poor due to the ensuing recoveries in stocks, commodities and foreign currencies. In recent weeks we noted this to subscribers as well as the fact that dollar sentiment was too bearish. Hence, we didn’t see a major breakout in gold or a sustained breakdown in the dollar.
Where will demand come from (to push Gold to breakout) if Gold is underperforming currencies, commodities and stocks? In other words, money is favoring the other asset classes. This is why relative strength matters. And it also matters because it shows the ‘real’ price of Gold (something that Bob Hoye talks about). If Gold is rising against foreign currencies, oil and commodities it means stronger leverage for the Gold companies. We can compare and contrast all of these things with charts. Technical analysis is very effective if you know how to use it.
