Taylor On The Markets
A Quick Glance at Major Market Trends
The U.S. Dollar Index
Published with permission from www.decisionpoint.com
The U.S. Dollar - Will the U.S. Dollar Index fall below its major support
level of 0.80 any times soon? The majority of Wall Street investors think
it will. On the other hand, Bob Hoye says that the senior currencies in all
pervious major bubbles have been the strongest currencies after the bubble
bursts. And as Ravi Barta points out, there is a very strong interest on
the part of our trading partners to keep the dollar relatively strong.
In fact the longer term gold market continues to paint a very bullish
picture as the following chart reveals.
Published with permission of www.decisionpoint.com
Gold Stocks
Assuming the dollar remains strong, how will that affect the price of gold?
Most investors think you have to have a weak dollar in order to see the
price of gold rise. Actually, as this secular bull market continues on, it
will at some point gain vis-à-vis virtually all foreign currencies. Then
gold mining companies will begin earning much healthier profits. As Bob
Bishop recently pointed out, the present price of gold makes all but the
best gold mining operations marginally profitable. With so little "juice"
in this business at this time, the junior mining firms are affected as well.
But keep in mind the gold markets are extremely small compared to the huge
amount of money changing hands in all the other markets. A very small
percentage of wealth flowing into gold can cause the yellow metal to rise
very dramatically in price and thus lead to huge increases in gold mining
firms, but especially in the successful junior gold companies that succeed
in discovering new gold deposits.
30 Year U.S. Treasury
On of the bigger stories this week has been the revelation that the U.S.
Treasury is likely to start issuing 30-year bonds once again. Why so? Most
people believe they are doing this because of the huge and growing borrowing needs of the U.S. Treasury. In fact, the latest reports suggest the Treasury's borrowing needs may be declining a bit from earlier forecasts. I believe the announcement the other day that the Treasury was "considering" issuing a 30-year Bond again was based more on the need to try to get the yield curve into a steeper position. In fact the Financial Times had an article this week that pointed out the rising risks to the financial system as a result of the flattening yield curve. Faced with his conundrum over the refusal of long term U.S. treasury rates to rise dramatically, I think the Green man in desperation pushed the Treasury to make this announcement.
As I recall when the Clinton administration announced they would phase out
the sale of 30-year Treasuries, the long Treasury rallied very hard. The
thinking most likely was that an announcement of the opposite would cause
the bond market to crap out. In fact,, as the chart above shows, the bond
market hardly dipped at all on this announcement.
Aside from the dollar, I do not believe there is any other market more
important than the long U.S. Treasury bond. If strength on the long end of
the Treasury yield curve continues, it could allow an already bubbly
housing market to become even more ridiculously priced. Unfortunately the
housing story and most likely the U.S. economy with it, will end in tears
if history is any guide and it usually is. We are in agreement with Ravi
Batra and Bob Hoye in suggesting the long U.S. Treasury and the dollar is
likely to remain strong for quite a while longer. In fact what we have
going on now is a 1930's style beggar thy neighbor currency devaluation
with the deflationary Japanese economy exporting deflation to the U.S.
Sure the U.S. is fighting it tooth an nail as Richard Russell says. But
deflation is the mystery that Greenspan can't own up to. Hence his use of
the word "conundrum" to explain why long term rates won't rise as they are
supposed to and Greenspan would like to cool the housing market.
Thank about it for a minute. If the general public believed deflation were
in the cards, what would they do? They would stop spending that is what
they would do. Why buy a car or house today if you think (as I do) that
they will decline in value tomorrow. So the Federal Reserve spin must be
"buy it now cause it is going to be much more expensive tomorrow." And so,
I think Batra and Hoye are right in suggesting the long U.S. Treasury may
remain strong for quite some time yet. As we said we are going to stick
with our long term U.S. Treasury ETL, namely the Lehman iShares known as
TLT until the U.S. 30 Year bond falls below its upchannel lines shown on
the following chart.
Commodities
The CRB continues to rise in its steeply sloped uptrend causing many people
to think we are into a new bull market in commodities. Actually a peak at
commodities adjusted for the decline in the value of the dollar reveals a
very lame commodity market. For example in "real" dollar terms, the CRB is
8% below its value at the end of 2000. And it is a full 33% below its highs
in the mid 1980's.
May 6, 2005
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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