After anticipating the coming Dow-Gold Crossover in the last
essay, let's take a look at the Dow-Dollar crossover that
has already happened in mid-2003. There are a number of revealing
insights that can be gained from this chart:
1 - Since February 2002, whenever the Dow rose,
the dollar fell;
2 -Whenever the dollar rose, the Dow fell;
3 -Sometimes the Dow and dollar fell together;
4 -The Dow and dollar (almost) never rose together
(except for a very brief three-week-or-so period during April/May
On this chart, due to the way it is drawn, the visual crossover
occurred in May of 2003, but the actual parting of ways between
the dollar and its progeny, the Dow, occurred about a month
earlier, in early April 2003.
However that may be, the world hasn't really
been the same ever since.
We all can remember only too well the time during
the latter nineties, when gold was bashed big-time in order
to not let on what would otherwise have been apparent: that
the dollar was way overprinted and was in danger of collapsing
even back then. Instead, it was kept super-buoyant by suppressing
its only real alternative - gold. The reason? To keep attracting
foreign investment funds to US assets and thus prolong the
party everyone was reveling in.. If the dollar appreciated,
all other US holdings by foreigners would appreciate right
along with it and keep them happy. The US needed that to fund
its then already voracious current account-deficit.
Just take a look how big it's gotten since then:
Of all US assets, treasuries and the Dow/Nasdaq were obviously
the biggest beneficiaries. The rising dollar made these assets
even more attractive than the already maniacal Dow curve had
done. But now, what have we got?
As noted before in other essays, we live in
crazy times these days. It's an upside-down world out there.
Traditional correlations of economic indicators are breaking
down, and new, far more shaky ones arise. Here are two major
1. Gold, the primordial inflation hedge, now
gets a boost when inflation is low rather than high. Why?
Because with low inflation, the Fed doesn't need to raise
interest rates as rapidly, which is dollar-negative on balance,
and therefore gold-positive. Another reason for this is that
after two decades of incessant misreporting and spinning by
the financial press and other nes commentators and reporters,
gold is now regarded as somewhat of a "fringe investment".
The traditional flight-from-paper effect of rising price-inflation
will this time come later than it used to - but it will come,
2. Interest rates are the Fed's primary tool
for "guiding" the business cycle. In the past, when
the Fed lowered rates by a significant amount, a credit-fed
boom invariably followed. But even though they were pushed
way down to historic lows and kept there for over a year,
this time the resulting cycle of borrowing, spending, hiring,
and inventory building by businesses has kicked in way too
late and is threatening to peter out far too early to ignite
the kind of boom that policy makers had hoped for.
Instead, this time around, rather than spurring
additional investment and production by businesses, the low
rates only helped the economy by sucking already strapped
consumers even deeper into the quicksand of the mortgage re-fi
swamp, and thus made them think they have more "spending
3. Finally, it now appears that the dollar,
that symbol of American economic might, must drop to insignificance
in order to allow US businesses at least a semblance of competitiveness
with their foreign counterparts - counterparts that operate
in countries who have nothing better to do than print prodigious
amounts of paper-money to buy dollars and treasuries so their
exports can remain artificially competitive. No wonder that
Bush officials have repeatedly harangued their Chinese-commie
counterparts to please, please, please! let the Yuan rise
so the upward pressure could be taken off the dollar.
Decades-low short and long-term interest rates,
held there for a full year, have failed to spur the kind of
economic miracle recovery policymakers where shooting for.
It is notable that last year's Dow "recovery" appeared
to coincide with a continued dollar-drop dating all the way
back to the USNDX' January 2002 high near 122.
As the chart above shows, during the period
from January 2002 to the end of June 2002 the dollar and Dow
dropped together like a co-dependent junkie couple. Then the
dollar began to stabilize, which threw the Dow into violent
convulsions until October 2002, when the dollar resumed its
That resumption of the downtrend appeared to
have "saved" the Dow and helped it to stabilize.
Later, in March 2003, the Dow finally bottomed again and began
its rather spectacular uptrend that lasted precisely until
February of 2004, when the dollar bottomed and reversed course,
which was the signal for a Dow reversal and protracted weakness
(see the narrow downtrend channel continuing to this day).
The problem is that the post-May 2004 resumption of the dollar's
downtrend did nothing to revive the Dow from its recent malaise.
Extremely instructive here are the two rectangles
outlined in red. The first one shows that the Dow actually
was mainly flat while the dollar rose from June to September
2003, during a time that superficially looks like the two
were rising together. The other interesting part is that the
dollar's bottom and the Dow's top during February 2004 exactly
coincided. The right border of the second rectangle shows
the 2004 dollar top, from which it fell into a tight but declining
trading wedge, the lower line of which it has convincingly
breached today, October 20, 2004.
Forebodingly - although not necessarily so significantly,
the Dow has not benefitted from today's dollar drop. Admittedly,
one day does not an established trend make, to be sure. But
the current Dow-down/dollar-down trend has been in place since
May this year - and that despite the "powers" all-out
attempt to trash gold during that very month! That oughta
give you somethin' to think about.
It is apparently felt among US economic policy
makers that only a vastly accelerated dollar-drop can revive
the stagnating and declining Dow. The uncomfortable fact that
gold will unavoidably trend upwards together with the Dow
as the dollar falls is apparently within the power mongers'
pain threshold - a necessary "price" to pay for
Let's face it: the Dow is the US new economy's
most enduring symbol of phony strength. The whole world looks
at the Dow, not least among which are US investors, consumers
- and voters. As long as they see the Dow above or at least
near the 10,000 mark, all is well in investor land. An already
crushed and anaemically languishing Nasdaq or S&P 500
can be tolerated, and no one ever looks at the NYSE anymore,
at any rate. But the mighty Dow, now that's another story
That brings us back to the question raised in
the Gold-Dow Crossover article: if a continued dollar-drop
results in no appreciable Dow-recovery this time, the concomitant
rise in gold prices MUST be stopped at all cost, lest the
Dow descend into the pits of hell! The only question remaining
is: will they be able to pull it off yet again, one more time?
Here is some evidence
that they are working on it already. This Bloomberg.com article
talks about how "vulnerable" the gold market is
right now due to its "overbought" condition - but
one day later the dollar rammed through major support at $1.25
to the euro, and gold rose above $420.00.
Nevertheless, even if the opportunity comes
and if they take it, pushing a normal gold correction farther
and deeper than it ordinarily would go on its own, will they
be able to make it stick for more than a few weeks this time?
Their dilemma is readily apparent. "Es
liegt auf der Hand," as the Germans say (transl.: it
lies in the palm of your hand, ready to be seen). The faster
and lower they let the dollar fall, the more powerfully gold
will want to rise, and the harder it will be for them to restrain
So, my hunch is: they will not be able to pull
it off again like they did in May this year. Not this time.
Oil - and Rising Interest Rates
A 70% year-to-date price rise in oil makes everything
more expensive. The Fed guys can crow all they want that this
oil price explosion has had "no significant impact"
on general price levels. Maybe not in their books. Not right
now - but very soon they will have to show it even in their
own cooked books.
Rising oil means rising production costs and
rising transportation costs. It also means lower spending
as disposable earnings shrink. Rising rates mean less consumer
borrowing and spending, and even less business spending. All
of that weighs heavily on corporate profit margins which are
the only basis for sustained stock appreciation. The Plunge
Protection team can conspire and buy stock futures all year
long - they cannot plug the cracking dam anymore.
Will oil prices recede again? Sure they will
- but from where? And when? And how far, before they resume
their inexorable uptrend that is dictated by the "Hubbard's
Peak" dilemma? And, since rising oil means rising price-inflation,
rising gold (and silver) prices are surely riding on its back.
vs DOLLAR CURRENCY WAR MONITOR
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