-- Posted Wednesday, 10 December 2003 | Digg This Article
F.O.M.C. AFTERMATH—As much as I enjoy criticizing Alan Greenspan and his central bank, I must also confess to having a twinge of sympathy at times like this. Almost nothing the Fed does at this point will change the long-term picture of things: a slowly stagnating economy, overcapacity, record debt levels, a falling dollar, rising commodities and the rest. Having already said in recent days what I thought the Fed should do and needed to do, I won’t repeat all that now. Suffice it to say, the F.O.M.C. fell short of the mark.
Sure, though the bankers foolishly kept their “considerable period” statement concerning how long they intend to keep the federal funds rate at one percent, they did make a small concession where their preoccupation with deflation is concerned. Now, they say that the risks of future deflation and inflation are roughly in balance.
This baby step towards acknowledging what the rest of us have plainly seen in front of us for months failed on two counts. First, it shows that the Fed does not take seriously enough the steady decline in the dollar’s value, one which has helped commodity prices soar and sown more seeds for even higher price inflation (and, I hasten to add, lower corporate profits) down the road. Predictably, in the moments following the F.O.M.C.’s policy statement, the dollar tanked further against most major currencies before stabilizing. Abetted by this, gold rose, a rally that went into this morning for a while and took the cash price a bit over $410 per ounce.
Second, this tacit acknowledgement by the Fed that it is willing to tempt fate even more where both the dollar and future price inflation are concerned caused long-term Treasuries to get hammered. In less than half an hour, the yield on the 10-year note spiked from around 4.20% to 4.37% before settling a sliver under that latter level.
Last but not least, the stock market is showing even more cracks. Most important to watch over the next few days will be the Nasdaq, which yesterday closed decisively below its 50-day moving average. It won’t take many more days below that level—especially if the 1880 level, the measure’s recent support, is breached—before long-suffering short sellers start feeling their oats again.
DOLLAR INTERVENTION—Overnight, the Bank of Japan once again acted to stem the yen’s appreciation versus the greenback, which at one point yesterday hit yet another low of under 107 yen. Though no official announcement came from the BoJ, estimates by currency traders are that the Japanese spent another $5 billion or so overnight in “covert” action to prop the dollar up.
Yet, the spike against the yen (back to around 108.4) did little to give the dollar relief against the euro, which it now takes better than $1.22 to buy one of. Further, as I write this, the dollar’s rally against the yen has run out of gas.
As you know, I often look upon economist and CNBC commentator/show host Larry Kudlow with some disdain. However, Kudlow was dead on the mark following the F.O.M.C. statement yesterday, when he (as he had the day before) highlighted the risks of the Fed continuing to make the U.S. dollar a “one-way bet.” Few completely understand that, if push comes to shove, the Fed is not in control of interest rates as much as it might think. As I’ve mentioned more times in recent months than I can keep track of, Greenspan himself should have 1987 in mind when it comes to understanding the ultimate consequences of allowing your currency to fall freely.
Perhaps the Fed knew something yesterday that the rest of us are not privy to; something which they think gave it the ability to be wishy-washy yet again where the dollar/inflation are concerned. Just as my “gut”—let alone technical, fundamental and other common sense reasons—told me in recent days that at least some profits needed to be taken in gold mining shares, so too is my gut now telling me that we are very near a nasty surprise for those currency traders who have taken Greenspan and Treasury Secretary Snow up on their one-way dollar trade. Kudlow himself offered yesterday the form it might take; an organized intervention including the Treasury that will cause the dollar to spike against the euro and once again make cocky currency traders more honest. It might also help if Snow starts telling us something different too; his “we believe in a strong dollar, one whose value should be set by the marketplace” contradiction is not only wearing thin, it’s become a joke.
So—especially if today’s bounce in the dollar peters out as have all the others recently, look for something quite out of the ordinary.
GOLD STOCKS GET CREAMED—For those few who sent me nasty-grams when I recently suggested selling some gold stocks into this multi-month rally, all I can say is, “I hate to say I told you so—but I told you so!”
For the second day in a row, gold mining shares, which in the few previous trading sessions were already beginning to bend, are being sold mercilessly. Just since yesterday, many—even some companies I have a high regard for—have dropped anywhere from 10-20%.
Adding to all the reasons I gave around Thanksgiving why it was a prudent course of action to book some profits, Barron’s came out this week with a story telling pretty much the same thing. That no doubt gave a lot more people than Yours Truly reaches some food for thought. I have to believe that today’s beating for gold stocks in spite of gold pushing temporarily above $410 per ounce also shows that some smart money (smarter and certainly less “religious” than the typical gold bugs) also smells what I do where a coming intervention to give the beleaguered greenback some relief is concerned.
If I’m right, we’ll see $380 gold once more before we see $420. In addition, it would mean that this sharp correction for gold stocks will turn into a rout of similar magnitude to that of last summer. The only difference is that the HUI (the Amex Gold Bugs Index) would take only weeks, rather than a few months, to lose 30-40% of its value. Following such an event would again be another glorious opportunity to load up for the next ride.
Two things will have to happen for gold stocks to avoid this near-term fate. First, I’ll have to be wrong about the dollar staging a sharp rally. Second, gold shares will need to remain technically in their long-term up trend. Currently, the HUI’s 50-day moving average is 219.63. As of around 2:00 p.m. Eastern time, the index was at around 230, down so far by some 11% from its current bull market peak of just under 260.
The 50-day moving average has provided rock-solid support for several months, and will need to continue to do so. Any serious break below it, and—for a while—it will be “look out below!” If it holds—and, further, if the dollar still can’t get out of its own way—I’ll likely be recommending that subscribers wade back in heavier at these lower prices.
-- Posted Wednesday, 10 December 2003 | Digg This Article
