A near one percent recovery took place in gold during its first June trading session. Following its worst weekly drop in over 60 days, gold found some old friends in Asia over the weekend - buying of the metal by jewelry fabricators became noticeable, finally. During Monday's trade, the metal also found other friends: crude oil, which rose almost $2 following Institute of Supply Management figures showing the US economy virtually back at the pivot point of expansion/contraction. While analysts had expected further contraction, the numbers point to continued demand overseas for US goods and thus they alleviated some of the energy demand-destruction apprehensions which gave rise to last week's rout in prices. Forecasts of $80-$100 oil before year's end were nevertheless heard today, and from more than one analyst. Ditto, the projections of an eventual exit from commodities by the hedge funds' hot money in the billions as they return to consumer and financial equities.
New York gold trading lifted prices to a high just above $898 per ounce as the greenback eased under 73 on the index following the rise in oil and after S&P downgraded the debt of Merrill, Lehman, and Morgan Stanley. Also on the minds of traders today, were words from Mr. Paulson that suggested that the credit saga still has months of unfolding ahead, complete with obligatory bumps in the road. In the wake of all this, the Dow promptly headed nearly 200 points lower in the day. While the economic calendar is not exactly lacking data flows for the first half of the week, the more significant and potentially dollar-moving figures will come Thursday and Friday.
In the interim, participants will be looking at numbers and central bank strategy trends coming from the EC in order to gauge what direction the dollar may be heading for in the near-term. Silver was off 4 cents, trading at $16.83 while platinum rose $3 at $2009.00 and palladium fell $5 to $433.00 per ounce. Adding to today's buoyant tone in gold were reports that the head of Wachovia was handed his own head on a platter by the bank's board. What's bad for banks is not too good for the dollar.
While various gold discussion groups were prematurely 'celebrating' the possible end of the US dollar's peg to the currencies of the Gulf's oil producing nations (they see such a move as the last proverbial nail in the greenback's coffin) Mr. Paulson was on a PR tour for the greenback in the region, and appeared to walk away with a tacit agreement for the peg to remain in place, at the very least, for the next two years. Moreover, he also welcomed any portion of the $4 trillion that the oil producers have amassed in revenues by now, for possible investment in the US. Bloomberg reports on Mr. Paulson's findings:
The comments may spur traders to further trim their bets on a revaluation in currencies such as the Saudi Arabian riyal and United Arab Emirates dirham. While the fixed exchange rates mean that costs of imported goods have increased as the dollar has weakened, Paulson said that the region's inflation is being driven mainly by costs of building materials and food.
``It is an endorsement of maintaining the GCC pegs to the dollar,'' said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Connecticut. In addition, ``ending the dollar peg, from the U.S. point of view, would diminish U.S. influence.''
Paulson meet today with Sheikh Ahmed bin Zayed al-Nahyan, managing director of the Abu Dhabi Investment Authority, the world's richest sovereign wealth fund, before giving a speech on open investment. In the speech he urged Persian Gulf countries to reduce barriers to international investment and pledged that the U.S. would remain open to capital from the region.
``As we seek to open new markets abroad, America will keep our markets open at home to investment from private firms and from sovereign wealth funds,'' Paulson said.
Although nothing is ever certain, it might be prudent to go out an buy another few bags of nails for that dollar coffin -assuming one can find any more such fate-sealing devices. The greenback's chances of complete cardiac arrest are now about as promising as Mrs. Clinton's odds for the nomination. But, odds are still odds, many will retort. Yes, but there are some long-time dollar and gold watchers who argue that it will soon be the dollar's turn to take a seat on the carousel for a ride to higher ground. One of them is John Dessauer - a name familiar to those who were watching gold back in the late 70's and early 80's. Here is what he had to say in a Marketwatch piece on the greenback:
Currency traders know Albert Einstein was right: All things -- especially in the currency market -- are relative.
You can't talk about one currency in isolation. Headlines tell us that the dollar is down. That means other currencies are up. But do they deserve to be up? Are those other economies that much better than the United States? And does the dollar deserve to be down? Is the United States making more serious fiscal- or monetary-policy mistakes? The answer is no. Popular dollar bashing shows that crowd's ignorance of Europe and Japan. For example, one popular, but completely wrong, notion is that the U.S. is flooding the world with dollars. In fact, the U.S. has been doing a much better job restraining money growth than the euro region.
If money-supply growth were the main driver of the world's currency market, the dollar would have been going up versus the euro. Instead the euro has been very strong. The common answer to this point is that interest-rate differentials are currently more important than money growth. That sounds good at first. Three-month interest rates are 4.86% in the euro region and only 1.96% in the United States. That makes the euro more attractive for interest income. But if interest-rate differentials work for the euro, they should work for the Japanese yen as well.
They don't. At 0.75%, three-month interest rates are lower in Japan than in the United States. If rate differentials were that important, the dollar would be rising versus the yen. Neither money growth nor interest rates explain the dollar's recent decline.
In spite of widely differing interest rates and monetary policies, the euro and the yen have marched in the same direction versus the dollar. From roughly June 2007 until March 2008, both the yen and the euro rose 19% versus the U.S. dollar. The reasons run from diversification by oil producers and China to outright momentum-based speculation.
Recently, the dollar has rallied; it's up roughly 3% from the March lows. This rally has sparked the debate: Which way next for the dollar? My opinion is the dollar is headed higher, to 1.30 versus the euro and to 120 versus the Japanese yen. The reason: The dollar has fallen so far that both Europe and Japan are suffering. Their pain is our gain. We can see that in the recent strong growth in U.S. exports. Our gain leads to a stronger dollar.
A strong argument can be made that the euro is not a sustainable currency. Separating monetary and fiscal policy just can't work for long. To me it is a wonder the euro has lasted this long. But strains are building. Spain desperately needs lower interest rates to prevent a real-estate collapse from dragging the whole economy down. Germany, a major exporter, likewise wants lower rates to bring the euro down. The strong euro is taking a bite out of German profit margins. But the euro-zone central bankers are focused on inflation and rapid money growth. They refuse to come to the aid of Germany or weakening economies such as Spain and Italy.
It is only a matter of time, probably less than three years, until the euro experiment meets its end, said Avi Tiomkin, a currency expert and adviser to hedge funds.
Japan is in worse shape. It's almost 100% dependent on imports of raw materials -- especially oil. The surge in oil and other commodities has cut deeply into Japanese corporate profits and consumers' buying power. The strong yen on top of the commodity-price surge is a major blow to the short-term outlook for the Japanese economy. The long-term record is no better. It has been 19 years since Japan's Nikkei Dow stock index peaked near 40,000. It recently stood at 14,000. Meanwhile, the U.S. Dow Jones Industrial Average has climbed from 2,800 to more than 12,000.
The dollar, the euro and the yen are the world's three major currencies, and, the more you know about Europe and Japan, the more you like the dollar. Thirty-five years ago, the dollar was falling versus the currencies of Europe. It was widely expected to fall to 1-to-1 against the legendary Swiss franc. It finally did that on March 8, 2008. And this dollar plunge, down 19% in nine months, looks a lot like the overshoot in the late 1970s. The dollar rose in the early 1980s.
The dollar will rise again.
With the above background items in mind, let's see how the oil/dollar saga unfolds this week and how the ECB and US statistics impact the markets. A respite from the declines would be welcome even if the potential gains could meet some profit-taking headwinds near $910. Are we out of the proverbial woods? Not quite yet. Tuesday could also prove more interesting for a related reason, briefly explained by Marketwatch:
To the delight of gold bugs everywhere, options on SPDR Gold Trust (GLD), the new name of the StreetTrack Gold Trust, will be available for trading on Tuesday. The Securities and Exchange Commission told exchanges late Friday that it had approved this much desired product, and the exchanges are spending today adding the new contract to their trading platforms.
One more way to play the gold market. In both directions.
Happy [options] Trading.