Thursday, August 14, 2008

Fundamentals or Intervention?

US Dollar Index


There is absolutely no logical or fundamental explanation I can think of for the massive dollar rally of late and the brutal crushing seen in both Gold and Silver prices.

Take today's news as an example:
- Much hotter than expected CPI reading - sharpest increase since 1991
- News that President Musharraf of Pakistan would step down
- No improvements to the Russian/Georgia situation - w/new fears of ethnic cleansing
- Housing situation getting worse - US foreclosure filings surged 55 percent

Each one of the issues above (on it's own) should have been a significant positive for precious metals, but no -- gold fell > $20 in the US market and another $10 thus far in Asian markets (Silver saw it much worse - as a percentage).

Call me a nut job, but this certainly doesn't pass the common sense test and reeks of massive intervention.

Highly respected James Turk felt the same way on his Aug 7th article: Mystery Solved

Same with Ned Schmidt and his Aug 12: Gold Thoughts

Your Thoughts?


Justin_n_IL said...

The mystery solved article was an excellent read Randy. Thanks for posting it. If it walks like a duck and quacks like a duck then.....

Anonymous said...

I stopped buying gold and silver after watching the video by Lindsay Williams on youbube where he mentioned when gold hits $800 some time ago, the power to be first manipulated the oil price down significantly and consequently drives down the gold price to $300! History seems to repeat itself right in front of us now!

I have a feeling the bullion price will go further down if gold is still mainly pegged to oil price.
I'm waiting for the day to come when gold is decoupled from oil, and is viewed as a monetory instrument, not just a commodity, and avearge Joe realizes he needs gold and silver as a his safty net, not the paper money in the bank, to support his retirement or whatever saving he can count on.

On the other hand, I do not regret I bought gold and silver on high prices weeks ago. Yes, the prices are so low now, but major dealers are out of stock! Isn't this a big signal of fishy things going on?
I am actually very happy that by paying a premium, I have something of real value in my hand that I can count on. It is better than a low price and you just can't have it!

Lindsay mentioned John Perkings in his video, the self-claimed economic hit man. I did a search.

The so called American democracy and free media are such jokes. I forgot who said this, nothing could be worse when the governemnt and private industry form a joint venture, a monster is created. We have Federal Reserve as an example, John Perkins provide ample evidence of how the government and private firms go hand in hand to ruin South America in the name of democracy and free market. It literally makes me feel sick.


Justin_n_IL said...

I'm a frequent reader of the Mish. He seems to disagree with Turk.

Currency Intervention vs. Fundamentals

On Monday, a post of mine, Currency Intervention And Other Conspiracies, stirred up a ruckus from those who see manipulation as the reason for the rise in the dollar. One person accused me of "yellow journalism" for not seeing manipulation as the "cause" of this rally.

I have exchanged friendly emails with others, most notably James Turk, a person I highly regard, about the Forex markets.

From James Turk:

I use the term "ignited" the rally. I agree the dollar was oversold, and a rally can occur at any time. But usually a market doesn't rally unless there is some news event or some fundamental change that causes the market to reverse course.

The Fundamental Change

That is a reasonable statement from James Turk, even more so if one changes "But usually a market doesn't rally ..." to something like "But usually a market doesn't have a sustainable rally unless there is some news event or some fundamental change that causes the market to reverse course."

I believe James would accept that and would also add there can be short term technical rallies at any time without any news, based on market players entering and exiting position at or near support/resistance points.

The key point in this is that often times a "fundamental change" is only obvious in hindsight, with the market reacting in advance. In my opinion, that is what James Turk missed in Mystery Solved when he proposed on August 7th "There has not been any news exceptionally favorable to the dollar. .... So what happened to cause the dollar to rally over the past three weeks? In a word, intervention."

The fundamental change is now, in my opinion, perfectly obvious: The economies in Germany, France, Spain, Italy, Australia, New Zealand, Japan, and the U.K. are all crumbling much faster than anyone expected.

Furthermore, New Zealand, Australia, and most importantly the EU are all going to violate price stability mandates to make the implied rate cuts that are coming! That is an enormous fundamental change given that interest rate differentials, and the expected rate of change of interest rate differentials are two of the biggest factors behinds trends, and reversals thereof, in the Forex markets.

Read that last sentence again, carefully: Rate differentials, and the expected rate of change of interest rate differentials are two of the biggest factors behinds trends, and reversals thereof, in the Forex markets.

Falling oil prices are yet another reason for the dollar to rally given that falling oil prices will help balance of trade.

In a market that trades $1 trillion a day, a onetime intervention of 10 billion Euros is simply not enough to cause a rally, at least beyond a day or two. Japan intervened to the tune of $300 billion over the course of about seven months and all it saw was a sustained move opposite to what Japan was hoping to produce.

Rest of that article here.

Justin_n_IL said...

I had some communication with Mish via email late last night. He made an interesting point with the following statement.

"The dollar most assuredly is NOT damned good. But it was ready to rally, and for fundamentals I might add. But data can change. And so can sentiment. Extreme sentiment against the dollar and extreme belief that Trichet would not cut fueled this rally.

I do not know how long it will last, and no one else does either. Lord only knows what idiocies the next Congress will come up with.

And it is Congress that is the threat, not the Fed IMO.

My max upside target on the US$ index is about 90. It may or may not get there but It could even get way higher. Why Can't it?

Those short the dollar are guessing and likely sweating. I have no position.

If it does approach 90, commodity bulls, especially energy, are probably in deep shit.


Dave said...

Things sure are out of whack! Instead of panicking, though, I find the perversely inverse behavior of everything reassuring! It means that the powers that be are pulling out all the stops to manipulate everything - their efforts cannot endure forever, although they have endured far longer than I ever dreamed they could!

I keep reading about a growing shortage of physical silver, and yet the price is plummeting! (See )

All the news about the U.S. economy and its dollar is negative - horrid actually - yet the dollar and U.S. stock markets soar, and gold and silver tank!

I feel like I'm living in "Backwards-World."


Anonymous said...

Mish is right that global economy is slipping into recession, however, that doesn't mean the U.S. is on its road to recovery. Hence, it doesn't make sense that the US $ is a safe heaven as Mish seems to believe. I think the current rally is temporary because currency should reflect the fundamentals of an economy. The US economy is in such bad shape and keeps deteriorating, and it is hard to believe the strength of the $ in the long run. I'm more inclined to agree with Peter Schiff's view.


Ellen said...

The problem I have with the pro-gold price comments of people like Turk and others who have a strong vested interest in the price of gold going up is their self-interest in presenting a one-sided argument. Bias is a very important filter we should use in evaluating the opinions that have been quoted in these comments, isn't it? Who can give me some well-reasoned and NON-BIASED commentary? Thanks.

Justin_n_IL said...

I don't believe the U.S. is on it's way to recovery. It does have a distinct advantage though with it being the World's reserve currency. My own opinion is that the dollar will continue in tact until they all meltdown. I see an entire meltdown and extreme upheaval to follow which will lead to a whole new system.