While gold is taking off to new highs and the Elliot Wave folks are scratching their heads as to why, the Dollar Index seems to be clinging closely to the 75 mark and not making its way down to the March 2008 low of just under 72.
Are we in a muddle through area for the dollar? Is there a chance the dollar may bounce from here and thus gold fall?
If you listen to the words of Timothy Geithner (and if you believe what he says), he supports a strong dollar.
“I believe deeply that it’s very important for the U.S. and the economic health of the U.S. that we maintain a strong dollar,” he said at a roundtable discussion with Japanese reporters. “We bear special responsibility for trying to make sure that we are implementing policy in the U.S. that will sustain confidence not just among American investors and … savers but investors around the world” that the U.S. will fix its budgetary problems as its economy improves.”
But Geithner also said the same thing back in January when the dollar was 13% higher.
“A strong dollar is in America’s national interest. Maintaining confidence in the long-term strength of the United States economy and the stability of the U.S. financial system is good for America as well as our trading and investing partners,” he said in written responses to questions from the Senate Finance Committee.
“As Secretary of Treasury, if confirmed, I will act to achieve those goals,” he said, according to the responses on the panel’s Web site.
Which Geithner do you believe, the January or the November one?
The January Geithner
The U.S. Dollar was markedly higher in January and since the Dollar Index had rebounded off its March 2008 lows as investors were scrambling for the safety of Treasuries. The Dollar Index when Geithner said that was around 86 as shown in this chart:
But now that everyone is talking about the dollar weakness again, as well as gold breaking to new highs, Geithner is stuck between the proverbial rock and a hard place. If he takes the strong dollar stance, it could kill the stock market rally, especially if the Fed increased interest rates. If he lets the dollar fall too much, there could be a rush for the exit with Japan and China leading the way. There is a reason why Obama chose this time to take his trip to China. The U.S. needs to maintain the U.S. Dollar’s world reserve currency status. It cannot afford to become a second rate nation. Something has to be done.
In late September, the G20 meeting result was getting China on board with his strong dollar initiative mantra.
Japan has been experiencing the unwinding of the Yen carry trade and has appreciated against the Dollar like many other currencies. So Geithner went to Japan and the result of that meeting was getting them to say they support a strong dollar.
China and Japan hold most of the U.S. Debt and with them on board, coupled with Obama’s trip to both countries in the last couple of weeks, something might be up for the Dollar. That something might be more U.S. Dollar support.
But What About the European Union and the EURO?
The EURO has been appreciating against the Dollar too. In fact I had written that the introduction of the EURO was an additional nail in the U.S. Dollar coffin and pointed out how things have changed for the U.S. Dollar since its introduction in 1999.
But the European Union leaders have been making the same mistake as U.S. leaders and the EURO is headed for trouble because of their actions. You could say that both the EURO and the U.S. Dollar are in trouble, but lets look at the data before coming to any conclusion.
GDP Tells the Story
Unlike China with 8.5% projected GDP growth for 2010 and Japan’s Q2 GDP surprise of 4.8%, as well as China and Japan’s trade surplus, the Eurozone GDP has recorded record drops with only a recent rise in GDP because of government intervention in the auto industry.
“This GDP growth [is] entirely a windfall from a policy-induced spurt of activity in the auto sector,” said Carl Weinberg, chief European economist for high frequency economics. Euro-zone GDP could even contract again in the final three months of the year as car subsidies are phased out, he said.
The forecast for 2010 GDP in the European Union shows 0.7% growth in 2010 and 1.5% growth in 2011 while the Federal Reserve is forecasting GDP growth at 2.5%-3.3% for 2010 and 3.8% – 5% in 2011 for the U.S. (to that I say hahaha!)
To show how bad things are in the EU, the European Central Bank (ECB) said;
The ECB still warns member states to start consolidating by 2011 to avoid paying higher interest rates when stimulus measures has been removed.
The point of quoting the ECB here is that they readily admit that if member states don’t get their financial house in order as a result of the (European) stimulus measures, they can expect higher interest rates.
Realize this….. the European Union is in just as bad of shape as the U.S., adding more debt to their economy and no real GDP growth yet the EURO has been rising against the dollar and is close to its all-time high again.
Does this make sense to you?
To Put Things Into Perspective, Take a Look at the Following Charts
This first shows the 5 year prices of gold in U.S. Dollars and EURO’s. Notice how the red and blue lines eventually come together?
This last chart shows the U.S. Dollar and Euro prices of gold for the last 30 days. Notice how the red and blue line are in sync? This leads me to believe the EURO blue line on the 5 year chart has some catching up to do with the red U.S. Dollar line and might offer a trader a better investment return in gold in the months ahead if they held their gold priced in EURO’s versus U.S. Dollars.
This is especially confirmed in my mind since the U.S. Dollar Index hasn’t broken down below 72 and also factoring in the Geithner and Obama Asia traveling show of late to ask (beg?) the only economies that are showing real GDP growth to “spare a dime.”
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About Doug EberhardtDoug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
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