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Dollar at the Crossroads?

By Jon Nadler      Printer Friendly Version
Feb 4 2008 2:12PM

Good Afternoon,

Gold prices slid back today and broke the $900 level they had held since the 23rd of last month. The dip was both shallow (to near $891) as well as fairly brief, as the metal came back to manage a close above $900, but the close broke below Friday's lows and it came at a time when platinum and palladium were roaring ahead and thus the disconnect is of concern to the (up to now) carefree speculative crowd. The noble metal has advanced nearly 20% this year as compared to gold's near- 5% gain. Mine output disruptions continue to fuel the rally in that unique niche. With 80% or so of global supplies coming from the very mines affected by electricity woes this is not a surprise. The surprise is the way that South Africa's Eskom is 'managing' the situation. Staff must have attended the Katrina/Brownie school of crisis management.

New York spot trading finished the first session of the new week mildly on the downside, with gold losing $3.00 per ounce at $904.90 bid, (participants earlier observed a stall in the euro's gains against the US dollar which dragged the metal down some $15 per ounce). However, crude oil turned around from its lows and spiked $1.55 higher (to $90.53) - a move which certainly helped gold somewhat. 

The yellow metal remains vulnerable to a visit near the $875/$885 area and players will now have to show that they indeed have the guts to follow the recommendations (make that outright commands) of the perma-bulls to buy on every single one of the dips. At least one of those soothsayer's  gut feelings were totally in error, as the rally that was supposed to add $25 to gold on Friday and another $25 this morning, not only failed to materialize but turned into precisely the opposite scenario. Silver dropped 6 cents to $16.70 bid while platinum rose $35 to $1791.00 and palladium moved $13 higher to $424.00 per ounce.

Here is an eye-opening statement/forecast you can easily find by running your own Google news search. [Yes, we could exclusively bring you stories about $1,000 gold and falling skies, However, as an information platform (and the best one at that) it is incumbent upon us to present the aspects that generally do not make it into the field of vision of the average precious metals investor. At that point, they can make up their own minds better, as they are closer to being fully aware of both sides of the proverbial coin/story.] Bloomberg reports that:

"Ben S. Bernanke's decision to lower interest rates 1.25 percentage points last month will end the dollar's two-year slide, according to the world's biggest currency traders."

Who dares to be of this opinion? Oh, only Deutsche Bank (the largest global currency trading firm), UBS AG, (the second largest), and BNP Paribas - (Bloomberg's most accurate of currency forecasters). Newsflash for the dollar's morticians: 

"Paris-based BNP, the most accurate of 31 firms surveyed about their currency predictions for the second half of 2007, is among the most bullish on the dollar in 2008 with its forecast of $1.36 per euro by yearend. Zurich-based UBS predicts $1.35. The median estimate calls for a 5.4 percent increase to $1.40 by the end of this year and a 6 percent gain to $1.32 in 2009. The dollar weakened 10.6 percent in 2007 and 11.4 percent in 2006 after strengthening 12.6 percent in 2005."

"Deutsche Bank AG, the world's largest currency trader, predicts an 8 percent gain in the dollar this year as the euro- zone economy expands 1.6 percent, lagging behind the 1.9 percent growth projected for the U.S."

When you play with billions of currency units and recognize that the ECB has been behind the curve and that the time may have come to move back into the greenback, it is safe to assume you need to know what you are talking about. Further:

" We remain wedded to the view that the USD (U.S. dollar) will ultimately determine gold prices; although currently under pressure, we believe the likelihood of a USD recovery later this year holds the prospect of eventually drawing precious metals lower," James Steel, metals analyst at HSBC in New York, told clients in a research note." Wait, he could be part of the 'cabal' - Yes, the cabal that happens to hold in custody the very metal the perma-bulls salivate over when pointing to the phenomenal interest in gold of late.

While this is a very early and perhaps small crack in the outer shell of the casket that the greenback had been placed into by the bottomless pit theorists, and significant dips may still be in the cards for the US dollar as the (thus far painful) first quarter unfolds, the sentiment is now undergoing the proverbial battleship turn and could show us a different picture after the middle of the year.

Thus, the possibility of one more spike back to $950 (or higher, even to $1000, if you insist) notwithstanding, the US dollar is very likely putting in a long-term, rounding bottom as we speak. And, yes, Dennis Gartman says that: "We have overstayed our welcome in gold." Just so you that you are aware. Gold's post-September 7 mega-rally (that's where our rally really was!) was most clearly defined by the slump in the US currency that the series of rate cuts have engendered. The upside potential is shrinking, the further one looks out. But, feel free to disagree with these firms and these analysts.

May we also remind that this is not about the price forecasting Olympics or about which camp prevails. This is about speculators obviously wanting to know what may come next. As well, about novice investors being tempted to jump aboard just because they caught a headline somewhere. There is a middle ground. A prudent person should keep around 10% of their wealth in the metal, and hope not to have to sell it. Who wishes to cash in on their life insurance policy before the sand runs out? It does not get any simpler than that.

Best Regards,

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.