Sunday, February 7, 2010

Dollar Strength Mostly a Mirage



The dollar is said to be "strong" lately, per the DXY chart nearby (click on all charts to enlarge). The DXY is principally a measure of the USD-euro relationship (58% weighting). 92% of the DXY derives from four currencies: euro, yen, pound sterling, and Canadian dollar.
The real world use of the dollar vs. other currencies is to trade goods and services. This is measured by the St. Louis Fed as a trade-weighted dollar.
The move in the trade-weighted dollar is almost unnoticeable lately.
Basically, we have been seeing weakness in the euro against the dollar for obvious reasons. Against other currencies, the Fed's easy credit policy has succeeded in keeping the USD relatively cheap.
I suspect that traders are gunning for leveraged speculators all over the investment map, regardless of "fundamentals". In this scenario, the markets "know" nothing, and price declines do not indicate that the "smart money" is in the process of getting out. Remember, during a half-year period in 2008, in which the price of houses in the U. S. perhaps fell 10% (who knows?), the price of oil fell 75%. Did the cost of finding and producing oil change? Not really. Did demand change much? No. Did the markets know anything at $140 or $35 per barrel? No. Did traders as a whole make money off the volatility? Yes.
Regardless of whether CNBC gold commercials sucked in a few latecomers to the gold party, the fundamental argument for gold for American investors is that the government is an irresponsible custodian of its currency. The faux strength in the U. S. dollar does not have anything to do with the longer-term prospects of the gold price in increasingly abundant printed and electronic greenbacks.
Gold will cease to be on my investment agenda when politicians stop promising much, more than they can deliver.
When will that occur?
I am reminded of a story from the 1990s, when an oversupply of natural gas looked endless and was called the "gas bubble" (not an investment bubble). Here's the story.
An oil and gas man calls to God for an answer to his woes. "God, when will this gas bubble finally end?"
God answers.
"Not in my lifetime!"
Copyright (C) Long Lake LLC 2010

1 comment:

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