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XMFSinchiruna (26.55)

Counterspin: The US Dollar Index in Context. The Rally is Pure Fiction.



May 02, 2008 – Comments (6)

With a barrage of babble coming through the media outlets touting a reversal in the US Dollar, I was finally annoyed to the point of posting this graphic.  The chart clearly demonstrates that there is nothing unusual happening with the dollar right now... these minor consolidations have occured at frequent intervals all the way down.

I am deeply disturbed by the decline of the dollar, and I wish this really were a meaningful reversal, as the US economy depends on finding one.  However, objectively I know that nothing fundamental has changed to create meaningful support here.  This amount of spin being devoted to the dollar right now is understandable, but disconcerting.  And to the extent that Fools alter their investment strategies accordingly, it is potentialy injurious.  Please be careful here, as this has all the earmarks of a massive headfake.


6 Comments – Post Your Own

#1) On May 02, 2008 at 10:43 AM, XMFSinchiruna (26.55) wrote:


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#2) On May 02, 2008 at 11:24 AM, klemenv (96.63) wrote:

Great chart.

BTW, how do you include images in blog? 

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#3) On May 02, 2008 at 12:27 PM, angusthermopylae (39.27) wrote:

I feel exactly the same way---it's almost as if there is a hint, a slight aroma of desperation in the way the recent news is reporting anything that can be spun as "good."

If anything, the fundamentals are piling up the wrong way.  Think of our economy as a pond, placid and serene.  All the fishies and bugs and plants are going abou their business, enjoying life.

Then, at various points around the pond, peole start chucking in rocks and debris.  By themselves, they make small splashes and little circular ripples.  But when the ripples start to converge, some cancel out, some reinforce higher, and some lower.  If it goes on long enough (and you add a stiff breeze), your picture of tranquility is turned into a splashing, choppy, muddy mess.

The whole picture is dynamic, but you can be sure Farmer John is going to come by and ask, "Who the hell has been throwing rocks in my pond?"

From a  more technical standpoint, an economy is a dynamic structure that, ideally, achieves a balance.  When something goes wrong on one side, though, the effects aren't felt right away throughout.  Harmonics build up, and those located at certain points will feel things worse than others...but only in transient.  The pain spreads from there, and the whole structure gets weaker.

Right now, for example, I sure wouldn't want to be a trucker:  Gas prices up, food prices up, construction materials way down...all the harmonics have converged on them, and when they are reacting (quitting, going bankrupt, raising prices to cover costs), they add their own harmonics to the structure.

But what do I know...I'm just a Fool. 

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#4) On May 02, 2008 at 3:09 PM, AnomaLee (28.87) wrote:

In no way do I disagree that the fundamentals have changed, but the landscape will eventually change even though we're playing on the same grass. I just can't tell whether things are going to get rosier or gloomier.

Today, there's one thing that I (and everyone else) am heavily focused on and that will be the results from the upcoming election. I think everyone in every market right now is trying to look around the curve and they're driving us to something that may or may not be beyond the bend. 

I still have a cautious outlook and I don't see the earnings growth to justify a reverse-to-peak anytime soon, but I've turned mostly neutral on commodities for now. Especially, since they're valued in dollars and I can't convince myself to say the dollar is doomed and will continue to fall as it has one year from now or see any reason why it should rally much higher.

After navigating and holding some biotech stocks I've learned that you can never ignore the political risks associated with investing.

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#5) On May 02, 2008 at 11:53 PM, XMFSinchiruna (26.55) wrote:

Thanks for the great comments, guys!

klemenv, to post an image, inside a pair of < > , type the following, where address = the web address of image:

img src="ADRESS"/

Fool on!

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#6) On May 03, 2008 at 9:37 AM, XMFSinchiruna (26.55) wrote:

How's this for disinformation... the notion that 'the dollar can't depreciate forever" doesn't actually constitute evidence.  And the forecasts for gold and silver contained herein are utterly laughable.  The author has zero understanding of the supply/demand situation regarding silver.  The only correct statement in here is that when gold and silver fall, silver falls further.

What he fails to mention is that when gold and silver rise, silver will rise further.  :)


Silver likely to drop faster than gold once the dollar stabilizes

LONDON: Investment money flooding into silver has overwhelmed poor fundamentals and helped it to outperform gold, but the tide could be turning for precious metals and the probability of large losses is rising.

Silver's price declines in percentage terms is likely to dwarf those seen in gold, which some fund managers say has stronger supply-demand fundamentals.

"History shows that when you get a substantial correction in precious metals, silver falls more than gold," said Stephen Briggs, an analyst at Société Générale. "It's a more volatile market and smaller in value terms."

One big reason behind soaring metals prices has been the tumbling dollar, making commodities priced in dollars less expensive for holders of other currencies. The weak dollar also prompts producers to raise prices to protect profit margins.

Last week the dollar fell to a record low against the euro - with the euro rising beyond $1.60, an event that has caused many investors to question whether the dollar's declines will continue, or if it has reached a bottom.

"The dollar is not going to keep on depreciating forever," Briggs said. He said he expected gold prices to average around $900 an ounce next year compared with $1,025 this year, and silver to average $15.50 next year compared with $19.20 this year.

Financial uncertainty, which has underpinned precious metals since August, is to some extent becoming less important to investors seeking the higher returns that stocks and bonds offer.

With a weakened case for holding precious metals, prices have started to slip. The spot gold price is now about $893 an ounce compared with a record high of $1,030.80 on March 17, while silver is trading at $17 after recently hitting a 27-year high of $21.24.

Analysts at Goldman Sachs said recently that they expected gold prices to be about $835 an ounce in 12 months and silver at around $15.50.

From the end of last year to March 17, silver prices soared by more than 40 percent, while gold was up more than 20 percent. The heftier gains for silver were built on heavy investor flows.

Barclays iShares silver trust, the biggest U.S. silver exchange-traded fund, now holds more than 5,770 tons of silver, a rise of about 10 percent since the end of last year.

Gold holdings by StreetTracks Gold Shares, the world's biggest gold exchange-traded fund, which is listed in New York, stand at 591 tons, down about 5 percent since the end of December.

"Silver is probably going to fall more than gold in percentage terms," said Wolfgang Wrzesniok-Rossbach, head of sales at Heraeus, a German metals trading group. "From an industrial and jewelry point of view, there has clearly been a decline in demand. There has been a lot of additional material coming to the market in the form of scrap."

More than 20,000 tons of silver were produced globally last year, compared with around 2,500 tons of gold.

The physical surplus in the silver market is expected by some analysts to rise to around 2,500 tons from a surplus of around 900 tons in 2007. The gold market could see a surplus this year of 600 tons from 500 tons last year.

"Fundamentals come into play when prices are coming down," said John Reade, an analyst at UBS. "Silver doesn't have gold's fundamentals."

Silver is often a byproduct of mining for other metals like lead, zinc and copper, and many mining companies are trying to ramp up production of those metals with some success.

That means more silver on the market. Together with scrap recycling, supplies are set to jump this year, while overall demand, including from exchange-traded funds, is expected to fall.

"Silver is very dependent on one source of demand - ETFs," Briggs said. "You can't get excited about silver in the same way as gold. Silver doesn't really have the same cachet."

"Demand from the photographic sector has been falling fast," he said, as consumers switch to digital photography from traditional cameras.

For gold, the picture is somewhat different. Mine production is expected to hold steady this year, but analysts expect output in South Africa, a major producer, to fall over the coming years because the ore that remains is deep in the ground and expensive to access.

Fabrication demand - for making jewelry and coins - is expected to continue unabated as rising incomes in emerging markets like China and India allow people to choose gold over silver.

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