Market Wrap

Week Ending 2/6/09

The U.S. Dollar

Last week's reported stated the following concerning the dollar:

The dollar appears to be topping out. The Canadian and Australian dollars seem to be bottoming out.

This suggests that commodity prices may rise, as the two latter currencies are commodity based economies.

The dollar closed down .63% for the week, most of that occurring today (Friday).

As I have noted several times recently, both the dollar and gold have been moving in the same direction: up.

This is a bit unusual, as generally they move opposite to one another, as the chart below shows.

So, what gives? Why is the dollar and gold moving in tandem instead of opposite to one another? The yen has also been moving in tandem with the dollar and gold.

In the past, gold and the yen moved pretty much in the same direction, while the dollar moved opposite to both. The charts show this clearly.

The dollar has changed its relationship (trend) with both gold and the yen; and several other asset classes as well. Will this change last?

The following charts compare the performance of several assets since last fall. The first chart shows the dollar, gold, and yen tracking together since Sept., and the second chart shows all other commodities going down since Sept.

Let's reiterate what we know or what the charts clearly indicate.

• Gold & the dollar generally move opposite to one another

• Since Dec. gold & the dollar have moved in tandem

• Gold & the yen generally move in tandem

• The yen & the dollar usually move opposite to one another

• Since autumn the yen & the dollar have moved in tandem

• Almost all commodities have taken big hits since autumn

• The stock market has taken a huge hit to the downside

But there are more pieces to the puzzle. Take a look at what has happened since the stock market was first hit starting in 2007: gold and bonds are up BIG time.

Clearly, something is up with the dollar. Overall, it's in a severe bear market for the last decade. From 2004-2007 interest rates rallied up and the dollar continued down to new lows.

Starting in mid-2007 rates began to plummet, as low as they could go in late 2008 and earlier 2009, yet the dollar has been rallying strongly since mid-2008. What gives?

Not only is the dollar a very sick puppy, it acts completely schizophrenic as well. Even the Fed admits the dollar has lost 95% of its purchasing power or value since the Fed was created in 1913.

So, why the hell is the dollar rallying? It seems to make no sense. Often times, however, things appear to make no sense, because they are making someone a lot of cents.

Now let's look at some charts of gold in various paper fiat currencies around the globe.

It's simply amazing: gold is making new highs in almost every world currency except the U.S. dollar and the Japanese Yen.

Next, let's look at gold priced in U.S. dollars and Japanese Yen.

Amazing how similar the charts look. Also, note that the Japanese Central Bankers were the first to employ a zero interest rate policy. Now Ben's tagging along for the ride.
A global currency game of de-valuation is going on: all currencies are continually becoming worth less and less (able to buy or exchange for less goods per unit of money); until eventually they all become worthless.

It can be no other way. It is what paper money does. The seed of self-destruction was planted long ago. 

The Japanese Yen is the currency that has been most used in the carry trades: the means by which the recent crack up boom that has now gone bust was financed.

Funny how it all makes cents: the two currencies that have zero interest rate policies (US dollar and yen); are the only world currencies presently not making news highs in gold.

If one didn't know better, it almost appears as if the game is rigged. Why in the world would the two currencies with zero interest rates be the strongest currencies at the present time?

When the proverbial crap hit the fan, and things started to unwind, there was a mad rush for the exit. Anything that could be sold was sold, to raise badly needed capital: liquidity trumped all else.

Tons of borrowed yen began to be paid back. There was a mad rush back into the dollar. The dollar is perceived as a safe haven in times of crisis, as it is thought to be the currency that will be the last to crash, due to its position as the reserve currency of the world.

Players had few choices when the crap hit the fan: the dollar; the yen; and gold. All other currencies and commodities were thrown to the wolves; and hence gold is making news highs denominated in the latter currencies and not in the former.

But you cannot fool all the people all of the time. Soon, the dollar will be seen for what it really is, and it will resume its bear market decent to hell, while gold climbs to heights unknown.

Silver

Silver had a good week gaining over 3%, closing just under $13. In last week's market wrap I mentioned that silver had broken out of a right angled ascending triangle that has an upside target of $14. It looks like we may be on our way.

RSI is overbought, however, but markets can stay overbought for long periods of time. A pullback/consolidation would be of no surprise.

The above is an excerpt from the full market wrap report available at the Honest Money Gold & Silver Report website. It contains detailed analysis of the stock, currency, and bond markets, with special focus on gold and silver.

This week's report contains twenty-five charts & graphs of the various markets and inter-market relationships. Stop by and check out our stock watch list and portfolio of all buys and sells executed this year.

Good luck. Good trading. Good health, and that's a wrap.

Come visit our website: Honest Money Gold & Silver Report
New Book Now Available - Honest Money