Wednesday, September 22, 2010

The U.S. Dollar Index Loses Key Support At 81

The U.S. dollar looks to be even weaker than I expected when I posted on this topic a few weeks ago.  I'm actually surprised and now believe the outlook is even more bearish.   At the time, USDX had "rolled over" after losing 81 briefly and bouncing.  I also opined that a technical/trading bounce into the 84-86 area was possible.  The dollar bounced up to 83.55 and has now lost key support at 81.

(click on chart to enlarge)

Of course, anything can happen on a day to day basis in terms of Central Bank intervention and movements associated with technically-oriented trading funds.  But we know that Fed is in the middle of engaging in record amounts of POMO (permanent open market operations), in which it goes directly into the market via the primary dealer system and injects funds into the banking system by purchasing Treasuries on a permanent basis (as opposed to the temporary basis of the more typical repo operations).

This is direct currency debasement.  In fact this week the Fed injected $5.2 billion, a record amount, into the system via Monday's POMO.  It is on deck to inject another $7-8 billion today and Friday.  I was chatting with a long-time colleague yesterday who remarked that he remembered when an occassional bi-weekly POMO of $750 million each would raise eyebrows.

The bottom line here is that the world is now officially engaged in currency devaluation wars and the U.S. is firing is its paper nukes into the global financial system this week with reckless abandon.  This is why every attempted takedown of gold and silver over the last week by the Fed/Treasury is failing.  Yesterday is the perfect example.  In fact my fund partner, who operated a commodities trading firm in the 1970's and lived through the last gold rush back then, remarked late last week that the "character" of the gold/silver trading right now is very similar to the market of the late 1970's, which was very volatile but seemed to move higher after every brief pullback.

I don't know where this current sell-off in the USDX will find support and bounce.  But I do know that when the dollar loses 80, and stays below 80 for while, it could trigger an avalanche of selling and possibly ignite a vicious sell-off in the bond market.  And anyone who says that gold is in a bubble and topping out here knows absolutely nothing about which they are talking.  Gold/silver are headed much higher before the end of the year.


  1. Hi Dave, question time, if I may. PMs rocketed higher after the Fed announcement on the view that there would be more QE. Yet as you point out, POMO is injecting billions weekly into the system. So, what's the difference between POMO and QE?


  2. LOL Hal!

    U-6. POMO is QE, and QE is just a euphemism for printing money. Technically, QE is considered less problematic from a currency debasement standpoint because the Fed is exchanging cash for Treasuries, so that the "cash" has an "asset" backing, as opposed to the "helicopter drop" in which the Fed prints up dolar bills and drops them directly into the publics bank account via some hoaky Government stimulus program. But at the end of the day it all involves ultimately expanding the monetary base.

    The Fed and the Treasury can play this game all day long in which the Treasury prints up Treasury bond certs and the Fed prints up money and buys the certs.

    At the end of the day, what we have is a growing cancerous mass of paper backed only by the "full faith and credit of the U.S. Government.

  3. I still miss 1150 gold. All my shares were near 52 wk highs then. NOw, they still have 20-30 % to go to get back there for most of them.

    I love free markets.

  4. To add. I like how gold only seems to go up when the equity markets are closed, lately anyway. That way they avoid any participation and euphoria in the gold share sector and as gold drops during exchange hours the shares drop too. Thereby eliminating much of the gains on the back of gold's rise.

    Call me conspirational.

    Maybe the next move will be lijke a geyser blowing though....but I doubt it, unlike some others.

  5. Agree Rothbard that it is a bit strange how that has been happening lately. On the other hand, when the cartel was in complete control, gold/silver always got slammed in post-Comex access trading.

    I'm wondering if the action is the result of momentum funds buying paper ahead of the Asian accumulation that occurs at night...

  6. To add to Rothbard's observation, it seems India's MCX commodity exchange closes at 11:30 PM IST (2 PM EST). I am watching the market for last few days and it seems Gold/Silver take down or take off immediately after 2 PM NY time. It seems vigourous market action after 2 PM NY time.

    Does anyone see any motive in the pattern?

    From India

  7. Dave,

    Do you or any other of your educated blog readers know of a site that allows you to chart ratios ie dow/gold, s&p/gold etc.

    I can find other peoples charts of this but I want to be able to do it up to date.

    Thanks in advance!

    Long gold & silver!

  8. Anonymous - google nick laird i think his name is. i think his site is stocklynx or something like that. he has all that stuff. there's a free section and pay section.

    Hi India: the normal pattern is slam at Comex open, rally, slam into Comex close, slam some more in early access. then aussia/asia/bombay buy and we go up. then slam a.m. London fix, rally until comex open and either way at p.m. fix.

    Lately some of that cycle has been broken. You are right, metals have been atypically strong in early access (trading after comex close) thru early acces close (5 pm NY time)

  9. Anon, maybe this is what you are looking for?