The Dollar, The Short-Term Outlook

Posted by Ray on August 17, 2009 under Main | Be the First to Comment

I have been very bearish of the dollar for some time and on a long-term perspective that remains true, but short-term is a different story. This last rally we had was more a function of a weakening US dollar and a drastically oversold environment rather than a function of real economic recovery. Contrary to popular belief the market does not represent the state of the economy.

In fact, it is a very poor indicator of economic conditions. As the talk about a new bull market and the economy has ‘recovered’ ensued over the past month it was primarily based on ‘less bad’ information. While people were trying to make you feel better about the real situation they forgot to examine the fundamentals or other reasons for equities to rise. In this case it was purely a fact of a few things that no one, for whatever reason, really looked at. The reasons are as follows:

A very weak dollar which eroded your real rate of return in the S&P or Dow.
Improved economic data, but by no means was the data as good as the market let on.
Drastically oversold situation heading into March where the markets were just decimated.
Asia’s economy does have decent signs of recovery, so that makes many assume we are recovering at the same rate which was false.

Since my call on August 7^th when we had strength in the dollar, the markets and commodities did not get crushed was indeed the top in the short-term. As the dollar continued its climb equities have declined, but the rise in the dollar is happening for a specific reason, a flight to quality. The likes of Goldman Sachs, Morgan Stanley, etc. knew that the conditions in equities were overbought in July and that there are still major fundamental problems within the banking system, hence the 77 closed banks so far this year.

When I put it together 2 weeks ago it was clear as day for me to see that as you were buying equities Goldman & Co. were selling and buying the dollar. I, obviously, cannot be 100% on that, but I assumed it was a good educated guess and was convinced to tell you all about it. I did sell into that last rally and sold even more last week because I fear a pretty nasty decline in our near future. I suspect there is going to be some revelation that regional banks are having a tougher time than we think and that some type of ‘Black Swan’ is about to take center stage.

This is why I am somewhat bullish shot-term on the dollar as the flight to safety picks up steam, which it will if I am correct. This, however, is very bad news for commodities which will become far cheaper in the near future as the dollar strengthens. In fact, this looks eerily similar to last summer before the real crisis hit. Now, I do not think things will get that bad, but anything is possible. The good news for all of us ‘gold bugs’ is that gold will get much cheaper moving forward. While I think gold will go lower short-term I am a long-term bull because we will eventually have inflation and that is why I always say buy gold in increments and not all at once.

Now, the Elliot Wave International CEO thinks the dollar is going to multi-year highs, but I highly doubt that. We will be the last country to absorb our excess liquidity, if we ever do absorb it, compared to Europe and other countries. Leaving the liquidity will either devalue the dollar further, which is my opinion longer term, or it will create inflation according to all the experts. Both way, this is a short-term outlook and you need to invest for the long-term, but make adjustments to what you can see in front of you in the present.

There is no doubt that we are heading for something pretty interesting and while I will not be happy to see my GLD and SLV, plus physical, go lower I welcome the buying opportunity. In fact, I am very excited over the prospect that palladium could go as low as $200 or so as I have had my eye on a 2006 Canadian Palladium coin. I also think we could see platinum drop to the $900ish area as well, which is exciting if you have been looking to buy some below its pricey $1,200 current level. Silver could drop back to the $10ish area and gold could drop to the low $800ish.

Remember, I am a long-term bull on precious metals, just currently a stronger dollar is not good news for them right now.