Gold Should Continue to Outperform; Dollar Should Fall

The world has passed through both 'Peak Currencies' and through 'Peak Dollar'.

Gold is rising as the world currency and means of preserving wealth.

The weekly chart of EUR/JPY, FXE:FXY weekly, shows a dramatic 0.57% fall lower, from an all time, which came in a long running ascending wedge pattern, with four weeks of rising price on falling volume.

An unwinding of the yen carry trade has commenced with interest rate differential rate investing reversing.

Investors will be buying the yen and paying back their 0.5% loans; the Bank of Japan will be foreclosing on loans not paid back, and taking whatever property was given in collateral.

Disinvestment has come out of yen carry trade favorite stocks such as the Brics, EEB, on May 19, as the TAF, TSLF, PDCF, rally ended and the EEB fell from 57.07; and then more recently on June 19 as EEB fell from 51.20, as news sources such as CEP News related the May Bank of Japan meeting minutes, which announced that inflation is an investment risk concern.

And disinvestment has also come out of world currencies, especially the commodity currencies.

The Euro, FXE, has fallen from 158.

The Australian Dollar, FXA, has fallen from an island reversal of 98 and then again fallen from 97.

The Canadian Dollar, FXC, has fallen from an island reversal and dark cloud cover of 101.5 and then again from 100.

One thing that is common to the fall of all these currencies is 'the date July 14, 2008' -- that was when the US Dollar, $USD, started to rise, as the yen carry traders and sold oil, USO, to take profit, and went long the financial sector, IYF.

Note on the chart of IFY, that "the rally is now done and over"; yesterday was a weak rise with a dragonfly candlestick; and today was a slight sell off with a gravestone doji candlestick; the chart shows bearish consolidation on falling volume. A dramatic sell off is coming within days; the yen carry traders who went long the financials will be selling; the last thing they want is to own level two asset laden, and level three asset laden stocks, that are marked to fantasy. Some type of dramatic sell off event is coming tomorrow August 1, or after the bell on August 1, or during the weekend, or next Monday August 4. The causative factor being an economic report, an announcement by the rating agencies calling debt and/or mortgage backed securities lower, or military confrontation taken by the EU US world government in response to the threat posed to global security by Iran's nuclear ambitions. One does not want to be short the oil ETF, USO, over the weekend, as it could easily gap higher on opening on Monday March 4, 2008.

Yesterday, July 30, 2007, was 'Peak Dollar'.

Now, today, July 31, 2008, gold is rising and the the dollar is falling.

The yen carry trade, EUR/JPY, FXE:FXY, will continue to unwind, causing disinvestment in both stocks and currencies. And the US dollar will be leading currencies ever downward.

The author in Calendar Yen Trading Patterns provides historical record that EUR/JPY and USD/JPY is frequently down in the month of August; this will awesomely exasperate the unwinding that is just now occurring.

US Treasury Bonds, TLT, failed on March 18, 2008 with the announcement of TAF, TSLF, and PDCF, and then again on Juiy 16 when the Federal Reserve moved to liquefy the mortgages GSEs, Freddie Mac and Fannie Mae.

In a world of increasing political tension, economic disinvestment and rising product inflation, investors are buying gold; the Resourceful Bear says: "Inflation is a stock, bond, and currency killer and a gold thriller". That is my quote, if you use it, please reference me.

The investment demand for gold is seen in the following ratios
gold relative to stocks, GLD:VTI,
gold relative to oil, GLD:USO.
gold relative to world currencies, GLD:DBV.

Gold is becoming "more dear" in terms of the important world currencies. Fresh, cup and handle patterns are starting that is going to take gold forever higher in relation to currencies. The date of May 1, 2008, was not only a World Revolution Day, but it was the day that institutional investors traded out of the high yield dividend paying stock, PEY, to go long gold with the yen carry traders, in CRB commodity futures and commodity indexed funds such as RJI, USO, and USO.
Gold in terms of the Australian Dollar: GLD:FXA
Gold in terms of the Euro: GLD:FXE
Gold in terms of the Canadian Dollar: GLD:FXC
Gold in terms of the Yen: GLD:FXY

Corey Rosenbloom provides helpful chart of gold in his article Gold’s Make or Break Zone Coming Up; it shows gold in outbreak since June 23, 2008 when the yen carry traders took heed to the May Bank of Japan meeting notes and sold out of the BRICS, EEB, and went long gold.

Geo-political analysis
Elaine Meinel Supkis relates in article Bank of Japan's 2007 Statistics relates: "The yen, representing an economy that is enjoying RECORD SURPLUSES and RECORD GROWTH, is weaker than the dollar and the euro."

However, this is just now reversing; an investment sea change is getting underway.

First, EUR/JPY is headed down; the yen is going to be getting stronger relative to the euro.

Second, USD/JPY is headed down; the US Dollar is going to win the race to the bottom, taking all currencies "right off the cliff" so as to speak.

Regional currencies may arise in South America, the Gulf oil exporting region, and in West Africa.

Investment Recommendation
While short selling may garner gains, it cannot preserve wealth, as all one has is a portfolio that is constantly depreciating in value relative to gold.

I recommend that one invest in gold with a diversified investment in gold at BullionVault.com, GoldMoney.com, and in a gold ETF such as GLD.

I also recommend that one open a Forex currency trading account and go short EUR/JPY and short USD/JPY.

Comments

[dieuwer:]

Do you think that the dollar will become the new carry trade currency?

2008 Aug 01 08:11 AM

[Gross Bill:]

"One does not want to be short the oil ETF, USO, over the weekend, as it could easily gap higher on opening on Monday March 4, 2008."

March 4?? How often do you write this piece...every other month?

"Note on the chart of IFY,"

I thought there were *editors* at SA

2008 Aug 01 09:24 AM

[NOWHEREMAN:]

short term dollar up, long term down. Way too many euro bulls. look for a move above 74 sabre rattling has a positive effect on the dollar.

2008 Aug 01 09:55 AM

[GMiki1:]

Nice analysis because it's based on a lot of study. I don't see the point in taking issue with a typo--we all make them.

2008 Aug 01 12:04 PM

[Jake2:]

Author is clearly a Gold Bug which makes his analysis biased to say the least. In addition, his "analysis," with all due respect to the author and to GMiki, is a bit over the top.
Viz: "Some type of dramatic sell off event is coming tomorrow August 1, or after the bell on August 1, or during the weekend, or next Monday August 4. The causative factor being an economic report, an announcement by the rating agencies calling debt and/or mortgage backed securities lower, or military confrontation taken by the EU US world government in response to the threat posed to global security by Iran's nuclear ambitions." Sounds a bit like Malthus, doesn't? Or John Maynard Keynes: “When the facts change, I change my mind – what do (you do?) .." Or, how about Adam Smith? Or Chicken Little even: "The sky is falling, the sky is falling . .. !" Chicken Little.

"Second, USD/JPY is headed down; the US Dollar is going to win the race to the bottom, taking all currencies "right off the cliff" so as to speak." Or over the edge, so to speak, or under the bridge . . . This is economic analysis?

As of this writing, GLD down 2.16% for the week. Full disclosure: I own GLD.

2008 Aug 01 01:59 PM

[fireball:]

physical gold and silver make me happy. my stocks only a few. my cash makes me unhappy. my forex account has been making me happy so far.

2008 Aug 01 02:12 PM

[xsuddensam:]

Why are those who favor gold as a hedge against a possible economic disaster denigrated by so many? It's hard to argue with history which is on the side of the "gold bugs".

The reckless management of our financial system is appalling and portends pain and misery like we have never imagined.

I will not be one of those who laments, "I wish I had bought gold".

2008 Aug 01 04:13 PM

[phdinsuntan...:]

The surplus in the balance of income rose to 16.3 trillion yen, an increase of 2.5 trillion yen or 18.4 percent from 2006. This marked a record high for the fourth consecutive year and reflected the following developments. First, the surplus in "portfolio investment income" increased as a result of an increase in receipts of interest on bonds and notes reflecting the continued accumulation of outward portfolio investment and the depreciation of the yen. Second, the increase in profitability of foreign subsidiaries of Japanese companies contributed to an increase in the surplus of "direct investment income. The Bank of Japan admits that the depreciation of the yen increases portfolio incomes! If something stupid like this makes one richer, of course, the Japanese will want a lot of weak yen activity going on and you will loose money, your only option to make money long in yen is with a market crash or some nasty event, and you are full of gold. With the inflation in europe is early to think euro is dead. By the way, gold is down...

2008 Aug 01 05:01 PM

[phdinsuntan...:]

once more, with cheaper yen/euro japanese exports
are more competitive

2008 Aug 01 05:04 PM

[yourdeadmeat69:]

The US Fed must print or make available 1-3 TRILLION dollars to cover Fannie and Freddie, because not only are subprime ripe not to pay, the valuation of ALL homes bought 2004-7 are overvalued 35%, of which 20% valuation remains to fall. 20% may be offset by 5% annual real estate inflation expectations, so in three years it may be mitigated by normal return to the curve, but meantime, EVERYONE purchasing a home '04-'07 is upside down, the valuation of their paper "off balance sheet". This balloon rests on a pin, and stays of execution, the on balance sheet requirements imposed for August, were extended to avoid more pressure on that "pin".

It's only a matter of time, until some pundit folks listen to yell "who's behind the curtain" and the wizard of Oz will reveal himself as Bernanke and his Congressional elves.

Whoever holds specie or miners at the time it bursts, will hold assets mining $2000 gold, $35 silver.

2008 Aug 02 08:19 AM

[Neal Vander...:]

"With the inflation in europe is early to think euro is dead."
there was inflation in the US before the dollar dropped. it's called stagflation. ie economy slowing while inflation still rises. this can be attributed to growth countries and Eurozone is not one of them.

2008 Aug 03 04:56 PM

[Neal Vander...:]

"once more, with cheaper yen/euro japanese exports
are more competitive"
depends on who they have to compete with. if China has to adjust higher because of their record inflation this will mean the yen can evaluate higher and still maintain competitive between rival.

2008 Aug 03 05:05 PM