Wednesday, September 22, 2010
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.
Posted by Dave in Denver at 5:38 AM