Sunday, August 17, 2008


Well I’m back to posting again after a 2 week gap! There’s a lot to catch up on so its going to take a few posts.

Gold has been slam-dunked, Oil is on its way down, the USD rebounds and the rally in Commodities is over!!!
So what happened?
Lets begin with an interesting article I came across on ‘ Central bank Intervention in currency markets’ Mystery Solved 7 Aug 2008.

The Triggers:

The slowdown in Europe will result in the ECB cutting rates.
The USA lead things on the way down, and so will be the first to recover.
The global slowdown has lead to a fall in oil consumption.

Weakening trends in the EURO and Oil and a strong USD

If there’s one thing that’s clear now, it’s that the ECB is in an equally tight spot as the FED. The FED has company!!! Does the ECB cut rates to avert a recession or does it fight inflation?

Are falling Oil prices a good sign, if they are due to contraction in demand?
Clearly speculators are bailing out too, but global demand is slowly!

The USD has pulled back sharply as the ‘Short USD/Long commodities’ trade unwound and the current uptrend is almost as severe as the breakdown in Gold. It should meet some resistance near the 78 level on the USDX.(Remember that the USDX index is EURO dominated)
So is the worst really over? (AGAIN)
While gold looks really beaten up at the moment, and Gold stocks have fared even worse, not a lot has changed in the last 2 weeks.
Central Banks are still dead scared of deflation!! And will use every means possible to get another bubble going. So that’s going to mean more intervention,bailouts and handouts to the clowns that got us into this mess in the first place.
Its also important to remember that Gold has historically never been strong in the May – August period, (usually bottoming out by August end.), so the USD rebound has added to the severity of the sell off.

I have been buying gold on declines, as it has smashed through one support after another ( $ 878.5, $ 850, $ 790), by staggering my purchases on the way down. The selloff has been so sharp that I expect a pullback especially as the Euro/USD has strong support at the 1.45 level.

So is this the return of Goldilocks? I think not!

----The US Housing market is still in a mess
----Freddie Mac and Fannie Mae need a bailout – or let’s just change the rules of the game for them!
----Are the write downs in the financials over? Or is the best yet to come? ( Like the recent settlements in the Auction rate Securities Lawsuits) More Capital raising / financial firms cutting Dividends?
----I ask again? What is the current market value of the ‘Toxic Bear Stearns securities held by the FED’ – No write downs there I hope?
----Is the strength in the USD due to any inherent fundamental change in the USD, or just due to the slowdown elsewhere?
----Can the Fed really hike rates to support the USD?—risking a meltdown in the US housing market and a collapse in US Consumer sentiment and consumption. On the other hand, how would the USD react, if the FED cut rates late into 2008?

----How long are the Central Bank Currency market interventions going to keep things afloat? Are they tackling the crux of this crisis( overleveraging and cheap credit) or just delaying an impending meltdown?
----Will the Volatile USD, (now strengthening), cause large USD holders to try to diversify out of the USD?
----Who’s going to blink first and do a bailout of a major Financial Institution- The Fed or the ECB?
----Even if the strength in the USD holds for a while yet, would you put money into stocks in an environment of inflation and slowing growth, where defaults across many sectors( not just financials) are likely to increase? I would be extremely wary of any analysts trying to call a bottom in stocks (especially the financials)!!!
----What impact is the Stronger USD going to have on the financial results of large US multinational companies whose results until recently have been ‘bolstered’ by the sliding USD. Extraordinary Forex losses in the second half maybe?

1 comment:

Anil Passi said...

Bingo....august is always a bad month for commodities, pick up any commodity chart and this becomes clear.

Mid September will be good time to buy gold, at the moment, its better to watch this knife fall.

Anil Passi