Saturday, July 19, 2008

On The Edge

This week the focus has been on the overall weakening of the US economy that has triggered many problems including bank failures, rising inflation, a credit crunch, a dismal and declining real estate market, etc. These are just a few of the problems. All of this spells possible doom for the US dollar.

To illustrate my point, I will again share some insights from www.GoldMoney.com founder James Turk. The article is titled "On the Precipice" (precipice means a very steep or overhanging place).

On the Precipice

It has been my view expressed in these alerts and elsewhere over the past several months that there will be a currency crisis this summer caused by a plummeting US dollar. The US dollar is now standing on the edge of the precipice. In fact, it is already peering over the edge as we can see in the following chart of the US Dollar Index.



There are several important observations to make from this chart. First, the dollar is in a major bear market. It peaked at 120.97 on July 5, 2001 and has been declining ever since within the major downtrend channel delineated by the red parallel lines.

Trends do not change unless there is some solid fundamental reason for them to change. There is only one way to strengthen a currency - raise interest rates. The Federal Reserve again failed at its FOMC meeting this past week to raise rates. So the only logical and prudent assumption is that the downtrend in the dollar will continue.

The second observation from the above chart is that the Dollar Index has been in a steep decline since early 2006, and more to the point, that decline gathered momentum along the way. The arrow on the chart marks the dollar's descent over this period. Note particularly how the arrow curves downward. It highlights the building momentum that caused the Dollar Index to fall last year to a record low on September 29, 2007.

Third, after making that record low, the Dollar Index bounced for only a few days, and then reversed course and resumed its downtrend. That action signaled profound weakness in the dollar, and sure enough, from its reaction high of 78.67 on October 8, 2007, the path for the dollar was basically straight down. It fell to a new record low of 71.33 on April 22, 2008, which equates to a stunning 17.3% annualized rate of depreciation.

The fourth and final observation is that since making this record low the Dollar Index has bounced. It is correcting the previous decline within the narrow uptrend channel marked by the green parallel lines. It is truly a so-called 'dead-cat' bounce. The best the Dollar Index could do was bounce to 74.15, retracing only 38% of its previous decline. But that is an overstatement because the Dollar Index traded above 74 on only one day, and did so simply because of the jawboning from Bernanke, Paulson and everyone else they could enlist to talk up the dollar.

As I stated in the last alert, which was posted just after the barrage of rhetoric, Bernanke and Paulson "are trying to change monetary history by ignoring this most basic principle of central banking. Rather than raise dollar interest rates, they are instead just jawboning" and "higher interest rates rather than more rhetoric are needed to save the dollar from a total collapse...[because]...the fundamentals for the dollar are horrific." In particular, as the rate of inflation worsens daily, inflation-adjusted interest rates become more negative. This condition is extremely bearish for the dollar. So will the dollar collapse this summer? Yes, I expect so.

The odds still favor a collapse. Nothing has happened - so far at least - that could cause the major long-term downtrend illustrated in the above chart to change. So assume this trend will continue, and more to the point, that the collapse in the dollar I have been expecting for this summer begins when the Dollar Index breaks down from its current uptrend channel marked by the green parallel lines.

Given that the Dollar Index is now sitting on the bottom line of that uptrend channel, it is peering over the precipice. The dollar may get pushed over the precipice this Thursday if the European Central Bank raises euro interest rates to fight the worsening inflation menace.

Get ready for whatever the central banks throw at us by their mismanagement of national currencies. Own gold and silver.

James Turk, June 28, 2008

Now, I've read in other sources that the Fed will start raising interest rates to combat the surge of inflation. This will fight inflation, but with the credit crunch already in place, raising interest rates will very likely stall the economy and send the US into the worse depression since the 1930's.

In November 1929, the Fed raised overnight federal funds rates of banks forcing them to close their doors because they could not meet the deposit requirements. This triggered many bank failures. If the Fed raises the interest rates too much now, the same thing will likely happen.

So, I sincerely endorse James Turk's recommendation to own silver and gold, as stated many times in this blog. This is one of the few defenses during uncertain economic times that everyone can agree on. There are of course, other alternatives, but not likely as safe.

I will disagree slightly with James Turk as to the timing of the imminent collapse of the US dollar. I do not think it will happen this summer, but I believe it will happen in September or October for a lot of reasons. First, the Fed is unlikely to shake things up by raising rates during the summer. Many traders and power brokers on Wall Street take vacations during the summer usually causing the markets to remain fairly stagnant. Once fall returns, all bets are off. Third, the earlier closed door session of Congress in March was rumored to prepare the legislature for financial collapse in the fall. The powder keg is prepared, all that is needed is a spark. Time will tell.

As with all Saturdays, I will recap several key indicators that provide insight into the financial markets and where they are likely to go. Precious metals went lower this week due to the fall in the price of oil. Gold closed slightly lower on Friday from last week at $955.40 per ounce. Silver also closed lower this week at $18.14 per ounce. The price of oil fell $16 per barrel the last four days closing at $128.50 per barrel. Despite these moves, the US dollar index still is languishing but rose slightly to close at 72.17.

These certainly are interesting times.

He will judge the world in righteousness;
he will govern the peoples with justice.

The LORD is a refuge for the oppressed,
a stronghold in times of trouble.

Those who know your name will trust in you,
for you, LORD, have never forsaken those who seek you. Psalm 9:8-10 (NIV)


If you have comments or questions, please feel free to contact me at the address below.
Email: DeltaInspire@panama-vo.com

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