The U.S. dollar, not so almighty anymore (and it could get MUCH worse)

Central Banks around the world added over $400 billion of “liquidity” (they printed money or bought securities) to the system.

Gold is up 6.8% this year; amazing, considering that gold has increased in price each and every year for the past 6 years. Gold is just another “hard currency”, so said another way the U.S. dollar is down about 6.8% (not exactly, but you get the point) against gold this year, and has been down versus gold for each of the 6 previous years.

Americans bought much less gold bullion, as measured by American Gold Eagle sales, in the first half of 2007 than they did in the first half of 2006. This is not true in the rest of the world (or gold prices would have fallen). The best explanation I have heard for this phenomenon is that American’s have far more faith in their government than citizens of other countries. I do not believe that faith is warranted regarding the American currency. Consequently, it is difficult to believe that the bull market in gold is over when the citizens of the largest economy do not own the metal in proportion to the rest of the world. As a matter of fact, I do not think the bull market in gold will be over until you see people waiting in lines trying to exchange their falling currency for gold.

The Federal Reserve is in a uniquely tough position. If they cut rates to support real estate (and the banking system, the Fed’s only true client) without the concerted effort of the other central banks, the dollar will fall, setting off a round of import inflation, and remember, we import oil, lots of it – at least for now. At some point the Fed is going to stop trying to pay for asset bubbles with a new bubble. Let me refresh your memory: 1998’s Asian Contagion and the Long Term Capital hedge fund crisis brought forth a spigot of liquidity from the Fed which led to the doubling of the NASDAQ stock market over the following 18 months and its subsequent crash. At which point the Fed began to add liquidity until the events of 9/11 at which time the Fed really poured it on, creating the housing bubble of 2001-2006. Now, here we are again but with a BIG difference. The U.S. dollar is going down like a whiskey shot, and the U.S. continues to borrow over $1.1 BILLION per day just to buy oil, and printing more money every day to do so with no hope of getting off this treadmill. The Fed’s past behavior made some real estate speculators very wealthy at the expense of the poor suckers stuck in those previously overvalued homes with mortgages they cannot pay. What a country! Now, what asset are they going to inflate in order to bail out real estate?

This is not to say that gold prices could not fall in the near term with the rest of the markets – it certainly could as investors might need to raise cash to pay for margin calls and sell their precious metals to do so. I do not sell gold bullion, and this is not a recommendation to buy gold bullion. Any investment decision you make you do so entirely on your own. I am precluded from giving specific investment advice in this forum. That is why I do not discuss individual stocks or bonds or make market calls. I can continue to speak in general terms – so let me start with my loathing of the U.S. dollar as a store of value. This disclosure and disclaimer aside, let us move on.

If you believe that the real estate market and the stock market have finished their gyrations and put in a long term bottom and are ready to resume their inexorable climb to “infinity and beyond”, have I got a tooth fairy for you…

Oil prices have slipped from their highs in the upper $70’s, but look at the trend. Oil continues to make higher highs and higher lows, and we are one event, one headline, from $100 - $150 per barrel oil. That won’t do much for housing, but it will do wonders for energy companies of all stripes. I continue to advocate buying energy companies on dips and sell offs and pruning the top performers on rally’s, redeploying to sectors in the energy complex that have not kept the pace. In the near term this is going to take courage, and will at times be met with “buyers remorse” as the housing and mortgage crisis plays out. Due to S.E.C. regulation, I cannot be more specific than this. This is not a recommendation to buy or sell oil futures or options. If you want to talk to me, you know where to reach me.

Important things to know for the next week:


• August 15, 2007 is a big day on Wall Street. That is the day investors must inform the big hedge funds that they intend to withdraw money from their funds.

• Oil inventories and Natural Gas inventory reports from the U.S. E.I.A. will increase in their importance each week through the OPEC meetings. Oil inventories are report each Wednesday and Natural Gas each Thursday, both at 10:30 am

• PPI, CPI, Housing Starts, and Building Permits are all on the economic calendar

Remember, the OPEC meeting is September 11, 2007. If I am correct, they will give some kind of excuse as to why it is not necessary for them to raise oil production - perhaps OPEC will use the U.S. Housing down turn or the market’s recent gyrations as the raison du jour. The bottom line: OPEC will not be able to meet the IEA and EIA call for a 2.2 – 2.5mm bpd increase in production. My bet is 500k at most, and for perhaps 6 months. Considering the declines within non-OPEC producers such as Mexico, Norway, and the U.K. that 500k is the proverbial "drop in the bucket".

Lastly, Chairman Bernake, Secretary Paulson, etc… are all out on the airwaves trying to manipulate you. Remember a couple weeks ago when both of these guys said the mortgage problem was, what was the word? “Contained”? Yes, that was it, “contained”. Now the word on Wall Street is “Contagion”. Announcements come on the front page, retractions on page 33 – and in small print.

Yours for a better world,

Mentatt (at) yahoo (dot) com