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A Walk Down Currency Lane

By: Jim Willie CB,

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Jim Willie CB is the editor of the “HAT TRICK LETTER”


For specific detailed analysis of the Gold, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and Fed monetary policy, see instructions for subscription to my newsletter research reports, which include stock recommendations positioned to rise in the commodity bull market.



To begin with, an “I TOLD YOU SO” is warranted, as the Iranian Oil Exchange is delayed by several months, maybe a year. My impassioned “Mosques, Civil War, Oil & Gold” article, dated March 2nd, forewarned on the delay and its side-tracked launch. See postings #1, #2, #3, which some editors found to be too controversial or portions off topic politically to post. The true motives behind the delayed launch are to remain debated. Perhaps a motive was to remove from the landscape yet another bomb target, a very easy target to hit and destroy. However, such delay will not put a stop to the USDollar decline. My source is quoted by the author of the Globe & Mail article, dated 14 March 2006 and cited below, by way of a reliable well-informed personal friend. In that article, John Partridge from the INVESTMENT REPORTER writes:


As the nuclear standoff pitting Iran against the West continues, some conspiracy theorists are more focused on another plan that the Middle Eastern nation is pursuing. But they are jumping the gun if they still figure Iran is within days of launching a new international oil exchange that would sell its own and other Middle Eastern oil producers’ black gold in euros rather than U.S. dollars, and which, the theory goes, could ultimately torpedo the greenback and the U.S. economy. Despite repeated reports over the past 18 months or so that the planned bourse would finally open for business on March 20, 2006 -- and go head to head with the New York Mercantile Exchange and the ICE Futures Exchange in London -- the start date has been postponed by at least several months and maybe more than a year.


“In the middle of 2006, we are able to start the bourse,” Mohammad Asemipur, special adviser on the project to Iran’s Oil Minister, said when reached in Tehran. The plan is to trade petrochemical products first, with a crude oil contract coming last, a rollout that likely will take three years, he said. “Oh, crikey, it’s at a much earlier stage than people would think,” said British consultant Chris Cook, who claims credit for coming up with the idea for the exchange in the first place and is a member of the consortium headed by the Tehran Stock Exchange that is charged with bringing the project to life. “You can rest assured, there will not be a crude oil contract, Gulf-based, in my opinion, within a year -- and that would be really pushing it,” Mr. Cook, a former director of ICE’s predecessor, the International Petroleum Exchange, said when reached in Scotland. The electronic exchange is to be located on Kish Island in the Persian Gulf, an Iranian duty- and tax-free zone.


The euro will benefit from Persian Gulf oil sales, with or without an official oil exchange. The important factors are where key OPEC nations store their surplus money and in what instruments, whom they sell oil to, and how they finance significant capital investments. Future energy sales will be encapsulated in grand contracts. Lately OPEC nations have been pouring money into the Middle East stock markets, but those markets have endured serious selloffs in recent weeks. They have also gone bonkers with a construction boom, complete with the giant amusement park Dubai World and golf courses. As investors exit the Middle Eastern stock markets, young and fragile to be sure, much of their money will find its way to a more stable gold bullion, whose destination has a long reliable history.



With little argument from anybody, gold has made a huge run since last autumn. Typically, in a strong bull market, most of the gains will be retained. Often a retracement of 3/8-ths of the gain from the breakout occurs into clear ground. In our case here, the gold upward path was painted by too many geopolitical brushes. Gold benefited from the monetary response to the natural hurricane disasters which persist. Gold was pushed by too many participants fed up with the bloated world currency, the most mismanaged currency in modern history, the USDollar, which fights the good fight in battling the inefficiencies of debt overhang and the threat of asset bubble dissipation.



The gold chart reveals a pause configuration known as a “bull flag” pattern. It gives some back, but not much. It backs off, but is resilient. Consolidation has taken place as it gathers strength under the surface. Steeply growing moving averages must slow their pace. Digestion in the form of changed hands, from weaker to stronger, is in progress. Lastly, a monumental shift is in progress whereby Westerners shed their gold to Easterners. The US and European bankers are handing off their gold (and future power) to Asians, in particular China, India, and Russia. February and March bring the pause that refreshes. We see a classic “bull flag” indicative of continued gold price gains. It is a reliable continuation pattern.



The euro currency refused to break down in the face of rising US interest rates since last summer. My forecast last autumn was for the 119 level to hold. It did not, pushed down from the political chaos associated with the “NO” vote for a constitutional union and centralized power in Brussels. A reversal did occur toute de suite, so to speak, as currency traders realized the union vote bore little significance on the newly hatched continental currency. Rumor of a new tightening cycle was followed by actual Euro Central Bank tightening, but with a denial of any new trend with more than one hike. That was not believed here at the Hat Trick Letter. Trichet made some bogus comment, meant to aid the USDollar, probably coerced. More FedSpeak exported. The motive is transparent and obvious, since the USFed is near the end of its tightening cycle. Higher interest rates support the USDollar. My Zurich sources tell me that big New York City money center banks are securing big positions in favor of the euro right now, and have been for a few weeks. Euro price action reflects this vividly.


Now in hindsight, the Nov2005 euro swoon can be deemed “slippage” which is technical analyst talk for a fixed booboo. The gap of May2005 was filled in Sept2005. The messy reversal Cup & Handle from Nov-Dec 2005 saw its potential target of 122.6 almost realized (close enough). The second ECB rate hike in Feb2005 (which made them look silly for past denials) has given lift to the euro’s sails. More rate hikes can be expected, prompted by higher CPI in Germany and Europe, which they do not falsify so much like the USGovt does. Check out the newly emerging uptrend channel. My forecast of critical support at 119 is looking more correct than erroneous. The next target is 122.5, then 125, then 129.



The contango is healthy in the futures contract, marked by rising prices for the more distant monthly contracts. The euro remains the principal competitor to the USDollar as a reserve currency. Little reversal patterns are littered within its chart. The lesser known, little respected euro carry trade is also unwinding. See the Iceland market damage three weeks ago, as their govt bonds were downgraded by Fitch. Much pain was doled out to both their bond values and their krona currency. Such is the fallout from euro carry trade being unwound, motivated by rising ECB rates, signaled by a rising euro currency. Speculators sell their object investment, and pay back their borrowed euro money. Typical objects are gold, the USTBond, crude oil, high yielding emerging market debt, and other commodities (like sugar).



The Japanese economy is enjoying finally an inflationary push. A few months in a row have seen positive consumer price trends. Their car industry is the primary beneficiary from globally higher gasoline prices, taking market share from the US crippled car makers. Why buy a car from a corporation destined for bankruptcy, when Japanese quality is unsurpassed? The unwinding of the yen carry trade will be huge, although probably much slower in its time span than expected. The Bank of Japan does nothing quickly, yet their actions can be decisive. The impact of the yen carry trade unwind, the impetus behind it, the time frame, its size, political pressures, even US influence (or collusion) is all covered thoroughly in the March Hat Trick Letter. Look for more collusion with the debt rating agencies. The effect will be both positive for gold and sure to introduce more volatility. Look for Japan to act in coordinated fashion with China. If one orders a higher currency, or enables it, or endures it, the other will permit their currency to rise in like fashion. Asia will act as an exporting unit, not to disturb its relative pricing.



Japan has been reckoned emergent from its deflationary morass so often that when it comes, it might seem a surprise. Yet the BOJ has attempted to make it clear they will hike rates from the near zero level, putting an end to their absurd Zero Interest Rate Policy. By the way, a ZIRP is the biggest black eye any central banker could ever suffer, the greatest ignominy and shame. Correspondingly, selling cars at zero percent with hefty price discounts is the biggest black eye a car maker could ever suffer. Japan emerged from the financial bankruptcy (asset markets). Detroit will also, but since in the real economy, the effect from its painful impact will be real, like lost jobs, lost pensions, and lost control. Look for Toyota to purchase car making plants at severe discounts.



Three very significant factors conspire to foster higher long-term interest rates in the US credit markets and economy. First is the growing distrust and disdain for USTreasury Bonds held by Asians. They are recycling much less of their trade surplus, despite what Buffet claimed today. He said “We buy Asian goods, and we sell them capital assets. They are happy to invest in our financial markets.” No way, Warren. Where have you been? Japan actually owned less in USTBonds in Jan2006 than last Sept2006, down a cool $20 billion. China has increased its USTBond holdings only minimally, up $10.4 billion over those four months. The real support for USTreasurys comes from England. A complex mix of hedge funds, illicit USFed agencies, and OPEC brokered purchases adds up to a big jump in their reported holdings, up from $183 billion to over $244 billion in four quick months. Neither CNBC nor the Wall Street Journal seems urged to explain. Asians and Persian Gulf oil producers have demanded higher yields for their holdings. They will be given exactly that, which means higher interest rates for the real economy.



Second, a combination of rising price inflation (whether admitted and reported officially or not) and a vigorous USFed tightening campaign push long-term interest rates higher. The CPI should be at least 3% greater, if honestly measured. The housing bubble puts the entire USEconomy at risk, from not only its higher prices but its likelihood of reversal. As the USFed hikes rates on the short-term side, the banking community requires the long-term side to follow suit in order to maintain profitable lending businesses. It is my expectoration that the USFed will be fighting an inverted Treasury yield curve until they quit and bring an end to the tightening process. Curiously, they might fight the inverted yield curve even after they stop hiking rates, especially if the USEconomy enters a recession. Long-term rates will fall if that happens, and might go below the official Fed Funds target short-term rate.


Third, the unwind of the carry trades ensures higher US interest rates. Not only the colossal yen carry trade but the smaller euro carry trade have begun to unwind. The easiest trade to envision is the borrowed yen at zero percent, invested in 4% USTreasurys for a profit without sweat. All hail the US financial engineering! In 2004, the rising yen was halted. A steadfast Bank of Japan intervention combined with a China outsourcing movement to halt the yen rise. This aided the yen carry trade, and extended its life. However, with rising BOJ rates comes gradual selling of the USTBonds bought on “carried yen” debt. Expect fits and starts with long-term rates, sure to provide unsettling volatility. For this reason, the USFed will exert considerable pressure on Tokyo to hike in small amounts and to hike infrequently.


In a worldwide tightening mode underway, gold might benefit as an alternative, especially since bond principal value is harmed. A declining US$ exchange rate further inflicts damage. Rather than stand pat and witness declines to mammoth foreign reserves, Asian central banks are likely to migrate some USTBond holdings into gold. Last week, gold purchase was motivated by war concerns from Australia to Hong Kong to Tokyo. In time these two motives will merge and be seen as one and the same.



The gold price has been under correction for over a month. The USDollar appears to be rolling over, set for a fresh decline. The euro currency is jumping after a threatened breakdown. The yen currency is awakening after a long sleep. Long-term yields in the United States have broken out higher, likely to go much higher. A powerful vicious hurricane slammed Australia with 180 mile per hour winds. They are in summer, and offer vivid preview to the US Gulf Coast this late summer. The Dubai Ports World snafu has faded as a story, without any report of the vested personal interest to profit from the deal by highly placed USGovt officials and related family members. At least in the 1960 decade, the press reported how Lyndon Johnson blocked FCC licenses for rival radio and television stations in Texas. Have news networks merged with state interests in recent years? More avian flu diagnoses, with concern over mutations to human communicable strains. Last week was a very interesting week, anything but boring.


Iran, USA, Russia, and China have engaged the United Nations in a high jinks game over nuclear technology, with the same disinformation games played as with the Iraqi War. See the mythical laptop PC smuggled out of Iran loaded with incriminating evidence (linking nuclear weapon development to the highest government levels) which nobody has seen, whose contents are to be trusted as damning according to the intelligence community, and which the International Atomic Energy Commission has largely dismissed as illegitimate. The same trick was used with Iraq last time, proved to be a ruse. Fool me once, shame on you. Fool me twice, shame on me. Oh yes, lest we forget, the Iraqi War is not paying for itself from increased oil output, as promised. Cost estimates vault into the trillion$ range. And what’s more, it appears that democracy might be incompatible with the Islamic culture, as feared. The Civil War is broadening inside Iraq, fully denied by the USGovt and US Military. Is our objective clear?


The Secy State Powell speech before the UN stated the murky case against Iraq, but no UN sanction vote was granted. The United Nations was sidestepped last time, with the US Congress employed as the foundation for war. The UN is being used as the device to sidestep Congress this time. The United States might force Russia and China to take sides. There might be no winners in this strategy. To be sure, most Americans are inadequately informed, just like with Iraq. In my view, the most dangerous development is how the US Congress has been rendered marginalized and unimportant, a non-participant and effront to representative democracy, which we claim to export!


In the ancient Roman Empire, their Senate became marginalized as it morphed from a republic to something much worse, finally chaos. In such a dangerous and unstable climate, it is difficult to imagine gold selling off. Any breakout of war on a new Iranian front will undoubtedly cause the crude oil price to spike upward. Whether the Straits of Hormuz are shut down in obstruction, that is yet another question. Any relaxation of tensions with Iran will surely remove $20 to $30 from the gold price, and remove $3 to $5 from the crude oil price. An ignited new war front will send the crude oil price to heights unseen before, and will send the gold price upward in a monthly $100 jump easily.



The United States, under its hostile, arrogant, irresponsible, nearsighted economic leadership, guided by misdirected, unwise, heretical, charlatan financial counsel, fully encouraged in indulgent, thoughtless, undisciplined, indebted lifestyle among the public, has actually thought it could export inflation, import deflation, enjoy the spending largesse afforded by a housing bubble, and expect to get away with the crime against Mother Economic Nature month after month, year after year. The price to be paid will come. It always does. Its form is uncertain. What is so exasperating is that instead of working toward a remedy, we desperately increase pressure on the gas pedal on the financial buggy. A flood of USDollars has entered into the world markets, with no prospect of abatement. The USGovt and USFed have inflated like crazy for ten years running, and now must defend the USDollar. THIS IS CLEAR WEIMAR-LIKE ACTIVITY, LOCKED INTO POLICY MAKING.


My view is that a return to normalcy is poppycock, never to happen! We have gone so far afield, so far from anything recognizable or rectifiable, that normalcy is not even remotely possible in the gold and crude oil markets. The USFed will tighten until they cause a crisis, then deny their role, then clean it up, probably followed by easing of interest rates. The next LTCM fiasco lies around the corner, under the surface, ready to be revealed, sure to wreck havoc. Gold and crude oil will be given a grand assist when it happens, not if. It is guaranteed since the USFed can no longer even define what “neutrality” means in its policy. Besides, what it says usually obscures its actual policy motive. My firm belief is that the Enron model was hatched from the USGovt incubator, where it continues.


Geopolitical tensions are elevated. Even when stable, they constantly remain very high. Gold usually thrives in such an environment. The pendulum of time and financial justice swings. We are on the doorstep to the next grand step down for the USDollar and the next grand step up for gold. Expect all hell to break loose when it becomes increasingly clear that the USFed is a blink away from the end of its tightening cycle. That is all that supports the USDollar, held by the tenterhooks of rising interest rates.




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Jim Willie CB is a statistical analyst in marketing research and retail forecasting.   He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at . For personal questions about subscriptions, contact him at  “

-- Posted Monday, 20 March 2006

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