Dollar, Gold and Oil: Gauging the Turn

The FOMC announcements of March 18, December 16 and September 16 each produced an interventionist surprise at the expense of the dollar. But unlike in the announcements of Sep 16 (AIG bailout) and Dec 16 (Fed's surprising zero interest rate announcement), Wednesday's announcement to buy long term treasuries and expand the purchase of MBS and Agency securities may continue to extend the dollar's retreat beyond just a few days. My warning for a turn in the dollar emerged shortly after the dollar index failed to break above 89.62 (euro equivalent low at $1.2455), which was a trend line resistance prevailing since the February 2002 high (peak of USD bull market).

So why is it different this time?

1. The Eastern/Central European story haunting the euro was clearly a negative theme for the currency, but such a story would only prove detrimental for the euro in the event of a bankruptcy/implosion of these banks. Absent those events, those fears were confined to grading watch from credit rating agencies, thereby, not justifying prolonged selling in the euro towards the October lows.

2. It is not enough to make the case for the dollar simply based on the premise that the Fed's aggressiveness renders the US economy most likely to recover the soonest. The fact that US credit market strains and ongoing macroeconomic spill-over show no signs of abating, justifies that intensity of the US central bank measures as they reflect the critical situation of US markets/economy. Also, recall that part of the Fed's liquidity measures have been aimed at shoring up liquidity for foreign central banks.

3. Technically, the ensuing positive correlation between the USD and global equities suggests an acceleration of the dollar sell-off as equities extend their recovery (albeit still deemed a bear market bounce). Indices would have to rally by more than 27%-28% from this month's lows to 845-855 in the S&P500, 4,460-4,500 in the FTSE 100, 4,680-4,700 in the Dax 30 and 9,000-9,100 in the Nikkei 225.

These are some of the factors most likely to make Wednesday's major Fed action different from the previous two by extending USD weakness (commodity strength) beyond just 2-3 days, and into mid or end of April-Mid May. These conditions are especially facilitated by oil's break to 2-month highs above the 100-day MA for the first time since August and a rally in resource metals (copper at 4-month highs).

What About Gold?

Gold's uptrend was bolstered by its ability to hold above the bottom of the 4-month channel of $880, its ability to limit periodic declines to no more than 10-11%, as well as holding above its 50-day MA. These technical criteria were first brought up on March 6. Having passed all these tests, I reiterate the near term target of $1,050.

Comments

[Bartlesby:]

Ashraf - in your chart you say that the 100-day MA exceeds the 200-day MA for the first time in 2 years, yet the chart shows that the 100-day exceeded the 200-day only 8 months ago.

Could you please clarify and also explain how this suggests a price target of $1,050 by the end of the quarter?

Mar 20 02:31 PM

[Prudent Man...:]

Should the U.S. economy recover "quickly" it will be shallow and short-lived as the structural dysfunction of our economy will not be corrected.

If we continue to devalue our currency and our creditors' balance of payments continue to decrease who will finance our deficit? Bernanke, evidently, does not see a problem here as it appears, in his political naivete, that Congress will sit on their hands during an election cycle while he decreases the money and protects the dollars buying power, a major responsibility of the Fed.

This should be good theater.

Mar 20 03:12 PM

[silverwood:]

Bart, if you look at the trend channel that Ashraf has drawn, the $1050 target is obtained from the top trend line. Also the 100 dma crossed below the 200 dma 8 months ago.
Ashraf, thanks for the great analysis.


On Mar 20 02:31 PM Bartlesby wrote:

> Ashraf - in your chart you say that the 100-day MA exceeds the 200-day
> MA for the first time in 2 years, yet the chart shows that the 100-day
> exceeded the 200-day only 8 months ago.
>
> Could you please clarify and also explain how this suggests a price
> target of $1,050 by the end of the quarter?

Mar 20 03:20 PM

[bricki:]

I don't think a quick recovery is exactly the primary danger here. What is scary is the idea that we will have an "L" shaped recovery and the various governmental bodies, Treasury, Fed and Congress will come out with things like Stimulus Part Deux (Deux Trillion), "New and Improved" Quantitative Easing and New Heavy Duty Helicopters.

Mar 20 03:24 PM

[yellowhoard:]

Betting on the government acting responsibly is a losing wager. Congress and a willing White House will continue to propose grand new spending initiatives.

This goes beyond mere ignorance of economics. I think that they are actively trying to drive us into the ditch so we will have to run to the UN for a rescue. This is what they have always prayed for.

Finally, we can all hold hands and live in peace with our neighbors. No more wars. Bla, bla, bla. The leadership in DC are true believers in this crap.

Mar 20 06:26 PM

[huskerbob:]

"Congress will sit on their hands during an election cycle while he decreases the money and protects the dollars buying power, a major responsibility of the Fed."
I thought the Fed's job was to create the "ideal" level of inflation. They have devalued the dollar 95%.

Mar 20 08:02 PM

[orangutan:]

" I think that they are actively trying to drive us into the ditch so we will have to run to the UN for a rescue. This is what they have always prayed for. "

Listen to hate radio much?

Mar 20 08:56 PM

[JudeJin:]

america is brankcrupt. there's no way out other than currency debasement.

roubini called united states of ponzi

Mar 21 12:09 AM

[Dave Wrixon:]

Yes, and the reason that most Ponzi scams come to light is that the perpetrator simply runs out of Money. Ben's problem is that he think he can print as much as he likes, and will therefore never be found out. Compelling logic there, if you are eight years old!


On Mar 21 12:09 AM JudeJin wrote:

> america is brankcrupt. there's no way out other than currency debasement.
>
>
> roubini called united states of ponzi

Mar 21 03:51 AM

[yank:]

Couple of observations:

1. Bernanke's Wed decision to "monetize" debt is indeed the nuclear option. He would not have taken such drastic measures unless economic conditions were deteriorating rapidly. This was a move of panic and desperation.
2. Bernanke believes he can "withdraw" most/all of this liquidity once economic recovery takes hold. I am not an economist but I do not believe that will be possible. Once inflation gets embedded in the economy it literally takes YEARS to remove it (see the Volcker story of the 1980s).
3. Wedenesday's decision is extremely bearish for the US dollar (USD) and bullish for commodities. Going forward commodities will be the best asset class to own as the USD revisits the 70 level.

Mar 21 11:58 AM

[LJR:]

I guess I'm a simpleton, but I wonder why anyone would see the dollar as a safe haven these days with all the new debt. Seems pretty frail to me.

Mar 21 01:27 PM

[Paul H. M.:]

why weren't people complaining when massive spending increases are military related? Is infrastructure (much of what we have no was built from the New Deal, so with it, the last century of growth may not have occurred).

According the the Fox News crowd, "It was not the New Deal, but it was WW II, that got us out of the great depression."

Both are massive spending and taxing increases on the rich. The main differences were that WW II spending went into the ocean as far as the domestic economy is concerned, but we actually got infrastructure that facilitates production and trade; the New Deal created infrastructure that made the last 80 years of growth possible. Without all those roads, schools, grids, and many other useful things, could we have been so successful?

Basic question: Why is massive spending good for the economy only when you spend it on military. Why is building useful stuff, like bridges and power plants, that businesses can use to operate, called "pork"?


On Mar 20 08:02 PM huskerbob wrote:

> "Congress will sit on their hands during an election cycle while
> he decreases the money and protects the dollars buying power, a major
> responsibility of the Fed."
> I thought the Fed's job was to create the "ideal" level of inflation.
> They have devalued the dollar 95%.

Mar 21 01:43 PM

[Paul H. M.:]

Since the other countries are doing the same thing, it kind of evens out. Japan has been doing this for years, and they still have the second largest economy (not bad for a small country that was nuked half-a-century ago).

My option: best to have the majority of your wealth out of currency all-together, but keep enough greenbacks withstand a prolonged period of deflation (since it really doesn't matter how much we print if nobody is loaning it out to the general public).

As far as money supply that we all have access to, it's still much smaller than during the housing boom.


On Mar 21 01:27 PM LJR wrote:

> I guess I'm a simpleton, but I wonder why anyone would see the dollar
> as a safe haven these days with all the new debt. Seems pretty frail
> to me.

Mar 21 01:48 PM

[change is t...:]

Thank you for this article, and the downside of the loonie article too. I am deeply skeptical of technical analysis. It can explain everything but its ability to predict depends on the analyst's interpretation of the facts.
My point is both gold and oil look like bear traps right now. Another way to play your analysis' conclusions without a chart is to buy the the US dollar bearish fund instead of either gold or oil.
The rationale for this is the facts are an evaluation of a monetary policy shift rather than a fundamental change in the supply and demand of physical goods or the threat of geopolitical instability.

Just for kicks, I will track equal amounts of gold (GLD) oil (USO) and bearish dollar (UDN) investments using friday's (March 20) closing prices as the start date, and the last day of April as position close out day. I will contact you on your web site with the results. Again, thanks for both articles, they are very clear and very well written. You may wish to read "The Education of a Specualtor" by Victor Niederhoffer at your leisure.

Mar 21 02:46 PM

[ManAboutDallas:]

Bartlesby,
I think what Ashraf MEANT to say, and didn't say very well, was that the upward crossing of the 100-MA above the 200-MA was the first time the crossover itself has happened in 2 years. In other words, "It's done it, again". I don't particularly comprehend the significance, but then I don't use either of those values or simple moving averages in my tech work.


On Mar 20 02:31 PM Bartlesby wrote:

> Ashraf - in your chart you say that the 100-day MA exceeds the 200-day
> MA for the first time in 2 years, yet the chart shows that the 100-day
> exceeded the 200-day only 8 months ago.
>
> Could you please clarify and also explain how this suggests a price
> target of $1,050 by the end of the quarter?

Mar 21 03:11 PM

[Plan B Econ...:]

www.planbeconomics.com.../

*If* hyperinflation were to occur, here are the 5 steps that could lead us in that direction

I say *if* because it is not a certainty. Keep in mind the collapse of the shadow banking system and the $trillions in liquidity that evaporated over the past year. Does the Fed's move outweight that? Can't tell just yet...

Mar 21 03:58 PM

[5142152-337:]

yellowhoard: You know we are in trouble when six (knowlegable) posters gave you a thumbs DOWN!

You are spot on.

orangutan: If you have been living in a cave, your ignorant statement is certainly excuseable. Otherwise, you have no excuse. To enlighten you, the UN is an arm of the US government to ensure illegal drugs, and strife amongst the weak is alive and well. To maintain this status quo, the US government (they don't deserve a capital G) funnels BILLIONS to the money hungary bloodsuckers running that house of horrors called the UN. The desired result is that one day the one world order will become a reality. Obama, Pelosi, Reid, et al will ensure it happens very soon. Why? Because they want to maintain permanent control of the sheeple who believe their lies.
May God have mercy on us (believers).

Mar 21 05:14 PM

[Minlita:]

In an attempt to prevent a Deflation the government is creating an Inflationary catalyst ( not bad in an environment of deflation) for the rise in oil price (priced in dollars) by printing money that causes a fall in the US dollar.
Commodities in general, including oil, should see a boost by the Fed’s policy, stock market would likely rise once commodities started going up.

Mar 21 06:05 PM

[coldcut:]

Rush, is that you?


On Mar 21 05:14 PM 5142152-337 wrote:

> yellowhoard: You know we are in trouble when six (knowlegable) posters
> gave you a thumbs DOWN!
>
> You are spot on.
>
> orangutan: If you have been living in a cave, your ignorant statement
> is certainly excuseable. Otherwise, you have no excuse. To enlighten
> you, the UN is an arm of the US government to ensure illegal drugs,
> and strife amongst the weak is alive and well. To maintain this status
> quo, the US government (they don't deserve a capital G) funnels BILLIONS
> to the money hungary bloodsuckers running that house of horrors called
> the UN. The desired result is that one day the one world order will
> become a reality. Obama, Pelosi, Reid, et al will ensure it happens
> very soon. Why? Because they want to maintain permanent control of
> the sheeple who believe their lies.
> May God have mercy on us (believers).

Mar 21 11:35 PM

[Heardt:]

The US hasn't been paying the UN any money for 8 years... that's part of the reason why it doesn't work. The whole organization is too underfunded to be effective. This leads to its lack of an effective means of policy enforcement. The UN can talk and talk and talk, and it's a great forum for ideas, but it doesn't carry a stick and has no standing army, so it is unable to enforce any of its policies. The UN is far from a "house of horrors", it is the most civilized political forum that exists on the planet. Unfortunately, it is bureaucratic, cumbersome and structurally outdated, making it unable to properly address current crises with the necessary strength to cause anything other than a cursory nod of recognition (see Sri Lanka, Lebanon, Gaza, Tibet, North Korea, Iran, etc).

Also because the way the security council is structured with vetoes for major powers, most significant actions that would altar the political landscape are qwelled. For instance, when Libya moved for the UN to speak out against the Israeli incursions into Gaza in January, the US moved to veto the decision. Similar actions have been taken in the past by China, France, and Britain.

World government is inevitable regardless of your perspective. And it by no means has to be a negative idea. Yes, it will further globalize the world and cultures and languages will die. But cultures and languages die naturally. It is a fact of life. Latin as a widely spoken language naturally died, there was no evil conspiracy to destroy Roman culture. But world government can ensure greater stability on a global level and prevent global war better than any other power sharing system. Of course, the means of government should be at question: will it be a republic or an empire? Hopefully, a republic. I, at least, believe in democracy and favor it to tyranny and autocracy.

This has nothing to do with permanent control by any coterie or clan. 5142152-... world government does not have to make us sheeple. There can still be free choice if the people of this world choose it. If they choose to be sheeple, however, they will be sheeple. There is always choice. You have chosen to be an outright cynic and to bitterly attack the establishment. You could just as easily devote your life to trying to change the system with polity, tact and information. If you went that route, in ten years you would probably be looked at by someone very similar to you right now with venomous scorn for wanting "to maintain permanent control of the sheeple." In reality, you would just be trying your hardest, with the tools at hand, to make a difference, and you would be misunderstood. Misunderstanding creates discontent. Discontent creates violence.

Don't create misunderstanding. The object is communication and understanding. The object is peace. I hope.

Mar 22 07:25 AM

[huskerbob:]

The dollar gets weaker, so commodities and the general market go up. So what is gained? They are going up as the dollar goes down. If you hold dollars, where does that get you?
Not certain why anyone thinks destroying our currency is some kind of accomplishment. Unless you hold a lot of debt. Then it would be pretty handy!
Enjoy your Dow 30,000, as you sip your $20 Coke and enjoy tunes on your $5,000 i-pod.


On Mar 21 06:05 PM Minlita wrote:

> In an attempt to prevent a Deflation the government is creating an
> Inflationary catalyst ( not bad in an environment of deflation)
> for the rise in oil price (priced in dollars) by printing money that
> causes a fall in the US dollar.
> Commodities in general, including oil, should see a boost by the
> Fed’s policy, stock market would likely rise once commodities started
> going up.

Mar 22 07:32 AM

[5142152-337:]

coldcut: I wish! I just call it the way I see it! Very nice, tho.

Mar 22 09:37 AM

[Distressed ...:]

Just watching USD:Gold decouple was a nice indicator. Posting some charts later, great article.

Mar 22 11:59 AM

[Northstar10000:]

The goof who can't tell the difference between military spending
during WW2 and infrastructure spending today is a perfect example of how twisted the logic of the left is and how warped are the minds of average americans. The global economy, massive debt at all levels government stupidity, government waste, money supply etc etc etc until the cows come home. Liberals you can start thinking again as soon as you wake up to the fact that what worked in the 40's won't work today. Continue to be fools and we will have the Republican brand of foolishness back in no time. You dumbo heads had a chance to break the cycle. Now we are just substituting fools for jokers.

Mar 22 03:17 PM

[Mad Hedge F...:]

This could be the big one. There have been 14 bear markets in the postwar period with an average 25% decline. This bear market is down 58%, and it still may have farther to go. No wonder everyone’s risk models are blowing up. This time it really is different. Over the last 100 years the average return on stocks has been 10% a year, with 40% of that coming from dividends. Today there are dozens of prime industrial companies offering dividends rates in the mid teens. Why investors are not loading the boat with General Electric (GE) stock yielding 12% at $9/share is beyond me. Take systemic risk out of the equation, and investors will leap at these.

Mar 22 03:19 PM

[change is t...:]

March 20 closing prices: (uso)...30.76...(gld)....
April 31 closing prices: (uso)...28.63...(gld)....

All three were lower.

Apr 30 04:19 PM

[change is t...:]

OK the results were: (GLD) was down $6.32.($93.59-$87.27) USO was down $2.13 ($30.76-$28.63) and UDN was down $.13 ($25.60-$25.47). None of the highs mentioned were hit and indeed this article almost perfectly called the top in GLD for authors' time frame.
All three were down between march 20 and april 31, however the dollar bearish fund was down the least in terms of percentage and actual loss. I again reiterate my deep skepticism of technical analysis and its ability to predict.

I posted only results to authors website. Caveat emptor.

May 05 10:56 AM