Lost USDollar Pillars

December 8, 2005

Several factors have begun to change, as the winds have shifted on the USDollar exchange rates in the FOREX markets. Since mid-summer, the gold price has been decoupled from the world reserve USDollar currency. That much has been well established, as the gold bull has stormed the palace on three continents. The yearlong bounce to the DX index has come to an end at around 92, where serious resistance lies. The weekly stochastix appears overbought, but has yet to crossover on the down side. Watch relative strength, which might be petering out, soon to turn down itself. The technicals on charts, for the DX as well as the euro and Japanese yen are covered in the Hat Trick Letter, December edition due in mid-month (as usual). Note that the long-term bounce off 80 has been historically unimpressive. With a top at 123, a bounce off 80 should have gone higher than to a mere 92 level. A 28% bounce off the bottom is lackluster & weak at best, pathetic & crappy at worst.

However, if the pervasively corrupted and flooded clownbuck declines, we will see a strong tailwind behind the gold price as it rises in the massive major Elliott Wave 3. Below are several factors which will contribute to sending the USDollar down. A gold price with some upward momentum is certain to accelerate its rise if the USDollar turns down.

  1. Foreign subsidiary dollar repatration ends on December 31-st. The Homeland Investment Act has been a fraud, enabling corporations to augment their stock values, dividend payouts, not to create jobs as originally intended. When the welfare program dies in 23 days, so will an impetus to prop the USDollar. Over $230 billion has return to US shores.
  2. The European Central Bank hiked their standard rate by 25 basis points, or 0.25% as that means. In doing so, the favorable rate differential afforded the US Treasury Bill on short-term yield has been removed. The ECB rate stands at 2.25% now, likely to go higher. Despite the silly cover that this is not the first of several "measured" hikes, the afficionados know better. The ECB hike is the first of at least four, which would take their standard rate to the 4.0% level. The old continent is matching the US hikes, removing the legs from the bond speculator rate arbitrage game.
  3. The US Federal Reserve is very close to the end of its rate tightening cycle. The Fed Funds futures shows expected at least two more rate hikes. The prevailing sentiment is "two and done" which would take it to a 4.5% short-term rate. Bernanke might hike once in order to prove he is not a wimp, a mistake in my view. A run on the USDollar might prompt him to hike more than once. Even so, the US might match ECB hikes stride for stride.
  4. The Japanese have essentially halted their USTBond support. This receives almost no press coverage. Instead, money has stayed home, with evidence being the Nikkei major stock index vaulting well past 15,000. Loaded to the gills, the Bank of Japan might have told the big banks, NO MORE. Lost Asian bond support makes for major damage.
  5. Oil producing nations in the Persian Gulf have not only halted USTBond support, they have reversed it. They are net sellers since the spring. On the financial side, local stock markets have realizes massive gains in that local region. On the commercial side, diverse and magnificent construction programs are underway to build hotels, airports, commercial parks, oil refineries, even landfills to extend urban property boundaries. The new King Abdullah has informally shunned the US$-based securities in favor of euro-based. Saudis are buying gold through Dubai and Turkey, despite denials.
  6. US trade gaps remain enormous and might remain over $60 billion on a monthly basis for some time. US exporters will be denied the advantage of favorable international pricing after this 15% bounce from 80 to 92 in the DX index. No structural reform has taken place to assist the trade imbalance. The Chinese yuan upgrade is inconsequential to date, as for remedying the bilateral trade gap with China, a correct forecast here.
  7. The end of the Greenspan Era and the dawn of the Bernanke Era will usher in a grand alteration to the backdrop of confidence in all things US$-based. A proven (undeserved) legend will be replaced by an untested (deserving of mockery) academic inflation flag waver. Bernanke past pronouncements should instill fear in anyone long the USDollar, owing to his steady reliance upon easy money practices and last resort desperation techniques. To approve this fellow as a Central Banker is tantamount to endorsing monetary inflation on a reckless scale. To call him an "inflation hawk" denies all past work by Bernanke. His US Congressional approval denied all his past writings, and accepted all his current statements. He said what they wanted to hear.
  8. The US housing market seems in many areas to have begun a stall, if not a decline. Many important measures show a stall, as adjustable mortgage rates have risen. Two forces (low mortgage rates, lax lending practices) have shown end stage indications. One new force (signs of Fanny Mae bankruptcy) has shown a spread of the foundation crack. If sheer weight from higher values does not invite a housing correction, then an assist by an incompetent USFed rate hike cycle will finish the job. All the while, fat Fanny's foundation is being shredded along all its flanks.

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com. For personal questions about subscriptions, contact him at [email protected]

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website http://www.goldenjackass.com that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

Jim's career continues to make waves in the financial editorial world, free from the limitations of economic credentials.

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China is poised to become world's biggest gold consumer.

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