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Monday February 25, 2008 - 12:56:11 GMT
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Gold Clues?

FX Trading – Gold clues?
It was a tough job but somebody had to do it. 

I just returned from a four-day investment seminar in St. Kitts.  During one of my speaking sessions I laid out some of the reasons why I believe the dollar could rebound in 2008.  After the session I had an interesting conversation with a fine gentleman.  He said to me, “You seemed a little unsure of the case for the dollar rally.” My short answer was, “That’s because I am unsure.”  But I can say that about any position I take.  If staying in the game is part of your plan, you should always be unsure or uncomfortable with your position.

I proceeded to explain that no matter what my current view of a particular currency, I am ALWAYS unsure.  No doubt you need to be able to rank and value one of your alternative views above the rest in order to have the confidence to pull the trigger.  But same token, it’s critically important, beginning about one-nanosecond after you pull the trigger on a trade/speculation/investment, to continually ask yourself this question: Where am I wrong?  Where am I wrong?  Where am I wrong?  And when it comes to the dollar rebound story in 2008, there are a multitude of reasons why I may be wrong; here is a list of a few:

1) There are just too many dollars being created and nobody wants them.  This falls into the keep it simple category and makes sense.
2) We haven’t yet reached a big enough sentiment extreme.  In fact, we are seeing bank analyst types warm to the idea the dollar will bounce.  And as one astute attendee of the St. Kitts conference said to me, “Maybe we should take the contrarian-contrarian view,” based on that piece of information.  Well said!
3) If gold and the dollar are a mirror image, as gold represents purchasing power in a real world of “stuff,” then the dollar is due of a beeline to new low territory.
4) Inflation in the Gulf States is exacerbated for those states with a dollar-pegged currency regime.  Maybe they pull the trigger soon.
5) Instead of the Taylor Rule (monetary policy rule supposedly followed by Mr. Bernanke) pointing to 2% Fed Funds rate, maybe soon it points to 1%. 
6) Decoupling (global growth w/o US participation) is real and stronger than we expected.
7) Russian leader Putin calls for all Russian oil to be priced in euro instead of dollars as a way to punish the US for what he sees as encroachment on his turf.
8) China realizes a stronger currency is in its best interest and allows for faster appreciation of its currency and targets its massive reserve base toward its domestic consumer.  Thus, reducing the need to hold so much US paper.

There are eight reasons.  Some of course are a lot more plausible than others, but overall probably not a bad list for this early on a Monday morning after the “grueling” St. Kitts conference.

Of late the US dollar has looked weak.  Any, or all, of the above list of rationales may be on the minds of traders if one is seeking to apply some cause and effect.  But one piece of evidence we cling to at the moment, could suggest there may be more going on underneath the surface in favor of the dollar than commonly believed; that think is gold.

Granted, the gold-dollar relationship of late is a thin reed of evidence, but the charts below are interesting I think.

Gold vs. US$ Index Daily:  The point of this chart is to show that until Jan 30th 2008, intermediate-term new highs in gold were quickly met by a corresponding new low in the US dollar index.

 [Chart not available in text format]

Gold divided by a currency basket (monthly series) that includes (euro, Swiss, pound, Aussie $, Canadian $, and yen): Gold has gone parabolic against these currencies beginning around July 2007; that happens to coincide with the first major bout of global credit crunch.  One could draw many conclusions from this chart (we really do see what we choose to see in charts).  But a couple of things pop into my head; a thought and then some questions:

1) Gold is finally playing its role as a safe haven against ALL fiat currencies; and

2) If gold is playing a safe haven role, AND money flows back to the US from institutional fund managers spooked out of overseas markets, is it possible we see the a gold-dollar decoupling i.e. gold and the dollar appreciating against the currency pack at the same time?
3) Does this parabolic-looking move suggest we are nearing a top in the yellow metal?
 [Chart not available in text format]

Hmmm…So many questions and so few crystal balls!  The St. Kitts beach beacons once again.

Jack Crooks
Black Swan Capital


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