DAILY REPORT (12/04/08)
Today was a very long day at the dentist so this will be a very short report. Old age is like an American made car the day after the warranty expires; everything starts to fall apart.
There wasn't much of a change today, as commodities continue to decline and oil is the perfect example. After topping out at $147.00/barrel back in July, the January crude contract closed today's session unchanged at $45.44 for a loss of $102.00 in just five months. The drop in oil prices has ramifications far beyond the price at the pump. The Middle Eastern countries were good buyers of US debt as the price moved higher, but have become net sellers as it declines. Also, a number of new refineries/storage facilities have seen construction slow down or stop altogether. Then comes the inability of commonwealth funds to make substantial investments in foreign countries. Finally, the plunging oil price will lead to political instability in the Middle East as well as certain Latin countries like Venezuela.
Commodities prices are almost all denominated in US dollars and as prices decline along with demand, we see less need for dollars. This helps to off-
set to some degree the fact that deflationary pressure would make debt more expensive to service and that would drive the dollar higher. It now may be that the downward pressure from declining commodities prices might very well outweigh the upward pressure from debt. Also as defaults rise, and they are, there is less need for dollars. Yesterday it was announced that credit card companies are reducing client lines by US $2 trillion. That is a significant number. In the chart above I highlighted with red arrows what I think could be a possible head-and-shoulders top (crooked I know) in the dollar and a break below the neckline (red line) currently at 85.08 would mean the formation is complete. I think we'll see it sooner rather than later.
Finally, I would like to close with a few comments on gold. Commodities have been falling like a stone and yet it seems to escape everyone's attention that the price of gold actually rallied 13.64% last month. I didn't
check every single commodity, but of all the ones I follow, it was the only one to go up. The yellow metal had a slight setback on Monday, but still held above the 772.50 level it broke out from. The last three sessions saw numerous attempts to break below it, but gold always recovered into the close. I believe that if gold holds 772.50 tomorrow and Friday, gold will start to move back up toward good resistance at 850.00.
I don't think the Fed can change the deflationary tide, so that means that the much prophesized hyperinflation may be a no-show. The dollar may fall down through the floor, but I still do not see how the US can experience a period of hyperinflation. Of the two evils, hyperinflation would be preferable to deflation as it would make debt melt away, and that's the only way it will be dealt with. The US will never be able to meet all of its obligations, so hyperinflation offers a way out. Deflation just makes debt more expensive. In either case, gold offers the only salvation for investors who desire to protect their wealth. Buy gold!
ebo@dtanalysis.com
Dow Theory Analysis SAC
December 3, 2008
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