Wednesday, October 28, 2009

Dollar Oversold?

I believe they are right. With this much bearish sentiment on the greenback, the times must be getting ready to change. I already missed out on buying Newmont puts early in the week. I think the dollar gyrations are just heating up and there will be more opportunity. Maybe I should look at the VIX too.

Please post your comments.


The Daily Reckoning
Wednesday, October 28, 2009

# Gold falls again as dollar rallies on lackluster consumer confidence,
# A closer look at that housing data...minus the "recovery" spin,
# The upside of Peak Oil, a few stocks to play it, and plenty more...


Bill is off trekking around the Andes somewhere, so let's go to Joel Bowman, with a few words from Taipei, Taiwan...

Dollar up, gold down. There's something we haven't written for a while. An ounce of our favorite metal dipped another $7 yesterday after falling $13 on Monday. It was the fourth straight session gold was in the red. Meanwhile everyone's favorite whipping currency, the greenback, consolidated gains won earlier in the week after sluggish consumer confidence data eroded risk appetite.

One day does not a trend make, dear reader, but it does us give pause for thought. What if we dollar bears are wrong about the greenback's fate? What if all these column inches spent bashing the buck - and the frauds at the Fed in charge of protecting it - all come to naught?

"Nonsense!" we say.

Mankind will eventually bury the greenback in the cold, hard ground, alongside every fiat currency that ever went before it. The only question, it seems to us, is when the first shovel of dirt will be thrown. Traders from New York to New Delhi are gathered around the open pit, but they may have to wait, at least for a while. Just to be on the safe side, we've bought (and urged readers to buy) a golden shovel, but for now we're content just leaning on it.

Here in the Far East, the dollar is a particularly curious entity. Once upon a time, the mighty greenback was the best show in town, the "must have" ticket for the rocking Asian economies. China, Korea and Japan all amassed gargantuan stockpiles. The three hold about US$4 trillion (with a "T") in foreign reserves, much of it in US Treasuries. Even Taiwan - an island one-third this size of Tasmania but with a population equal to Australia - has stashed away the equivalent of US$332 billion in foreign reserves.

But that was then. This is now. And now everyone knows what all those dollars - and the men who stand behind them - are really made of...paper and promises, promises and paper. And now that the game is up, everyone is betting on a dollar collapse. But that presents a problem, and an opportunity, in itself...

"Whenever you find yourself on the side of the majority," Mark Twain once observed, "it is time to pause and reflect."

Right now, every necktie on television is betting against the dollar. The Powershares DB US Dollar Index Bullish and Bearish Funds - which measure the sentiment for and against the greenback versus a basket of six major currencies - are showing dollar bearishness in the extreme. But what if this "recovery" is not all it's cracked up to be? What if equity markets suddenly start resembling reality - even for a short while? If risk appetite contracts, even marginally, might we see a rally in short term Treasuries...just like we did last time? And just how quickly will currency traders be able to cover their short dollar positions if such a scenario unfolds?

We don't know the answers, dear reader. We only observe that the larger the mob, the more likely it is to be galloping in the wrong direction.

So are we dollar bears, or bulls? The answer, dear reader, is both - the former over the long haul...but the latter before then.

Dan Denning, our friend and colleague on our Australian DR desk, puts it thus: "Though we are confirmed US dollar bears, the dollar is looking oversold. Stocks are looking overbought. And frankly the reflation of all asset markets (bonds, stocks, commodities, and real estate) is looking over cooked... Watch out!"

1 comment:

Sojka's Call said...

Keith wrote "These are interesting times. The market forces seem to be struggling back and forth with fluctuations of as much as 2 to 7% in some of the issues I am holding. Uncertainty seems to be playing more of a role than any real greenback improvement or deterioration. Tell me more about the VIX as an indicator. Is that more an indicator of uncertainty or can you gain a sense of directionality from watching that index? I just did a 6 mo comparison of SLV vs GLD, vs PSAFX and the DOW. The best play if you could anticipate the ups and downs was SLV. Surprisingly all of them tracked each other with the greatest increase in the DOW. PSAFX which is an inflation hedge was a damped down GLD trend while SLV fluctuates more wildly. Personally I have not played any of the ups and downs but do hold SLV and PSAFX as a hedge. Meanwhile the energy and even issues that anticipate a recovery such as AA (Alcoa) have done quite well over the same timeframe. The price of gas at the pump has risen about 10% around here in the past two weeks coupled with a rise in a barrel of oil which would indicate a real dollar deterioration. Why is gold down or not steadily rising? It is down today."

VIX is a measure of market volatility. I have not been watching it too closely lately. Looking today it seems I am about 5 days late to that party since it has jumped big the last week.

Gold has an inverse relationship to the dollar and since the $ is going up, gold is going down. Silver may be the best long-term bet right now with the most potential gain..