Questioning the Current Outlook for Gold, the Dollar and U.S. Markets

Gold has been slam-dunked, oil is on its way down, the USD is rebounding and the rally in commodities is over - So what happened?

Let's begin with an interesting article I came across from Aug. 7, 2008.

The Triggers:

• The slowdown in Europe will result in the ECB cutting rates.
• The USA led things on the way down, and so will be the first to recover.
• The global slowdown has lead to a fall in oil consumption.

Weakening trends in the euro, oil and a strong USD

If there’s one thing that’s clear now, it’s that the ECB is in an equally tight spot as the Fed. Does the ECB cut rates to avert a recession or does it fight inflation?

Are falling oil prices a good sign if they are due to contraction in demand? Clearly speculators are bailing out too but global demand is slowing.

The USD has pulled back sharply as the ‘Short USD/Long commodities’ trade unwound and the current uptrend is almost as severe as the breakdown in Gold. It should meet some resistance near the 78 level on the USDX (remember that the USDX index is euro dominated).

So is the worst really over (again)?

While gold looks really beaten up at the moment, and Gold stocks have fared even worse, not a lot has changed in the last 2 weeks.

Central Banks are still scared of deflation and will use every means possible to get another bubble going. So that’s going to mean more intervention, bailouts and handouts to the clowns that got us into this mess in the first place.

It's also important to remember that Gold has historically never been strong in the May – August period, (usually bottoming out by the end of August), so the USD rebound has added to the severity of the sell-off.

I have been buying gold on declines, as it has smashed through one support after another ($878.5, $850, $790), by spreading out my purchases on the way down. The selloff has been so sharp that I expect a pullback, especially as the euro/USD has strong support at the $1.45 level.

So is this the return of Goldilocks? I think not!

The US Housing market is still a mess.

Freddie Mac and Fannie Mae need a bailout – or let’s just change the rules of the game for them!

Are the write-downs in the financials over? Or is the best yet to come? (like the recent settlements in the auction rate securities lawsuits). Can we expect more capital raising by financial firms coupled with the cutting of dividends?

What is the current market value of the Toxic Bear Stearns securities held by the Fed – No write-downs there I hope?

Is the strength in the USD due to any inherent fundamental change in the USD, or just due to the slowdown elsewhere?

Can the Fed really hike rates to support the USD—risking a meltdown in the US housing market and a collapse in US Consumer sentiment and consumption? On the other hand, how would the USD react, if the Fed cut rates late into 2008?

How long are Central Bank currency market interventions going to keep things afloat? Are they tackling the crux of this crisis (over-leveraging and cheap credit) or just delaying an impending meltdown?

Will the volatile USD, now strengthening, cause large USD holders to try to diversify out of the USD?

Who’s going to blink first and do a bailout of a major Financial Institution - the Fed or the ECB?

Even if the strength in the USD holds for a while yet, would you put money into stocks in an environment of inflation and slowing growth, where defaults across many sectors (not just financials) are likely to increase? I would be extremely wary of any analysts trying to call a bottom in stocks (especially the financials)!

What impact is the Stronger USD going to have on the financial results of large US multi-national companies whose earning have until recently have been ‘bolstered’ by the sliding USD. Can we expect extraordinary forex losses in the second half?

Comments

[CLH:]

In other words you think everything is the same. Im afraid you are wrong.

2008 Aug 17 07:20 PM

[CaptBob:]

A litany of "What if's"
The only valid "what if" is Hank and Ben fiddle, fuddle and manipulate as long as possible and beyond to avoid calamity, pre- election. Thereby just digging a deeper hole of denial that will take a looong period of fiscal restraint to climb out of.
"If" you don't think Politicians have the will power---buy gold!

2008 Aug 18 01:53 PM