Technical Trading Patterns: May 2009

Sunday, May 31, 2009

Cross Currents - Awesome Article.....

Crosscurrents

The factors driving the dollar seem to vary with the season. Last fall at the height of the financial crisis safe haven flows trumped all considerations; at one point investors accepted zero return for the security of holding US debt. The dollar rose 17% against the euro in a month and made similar gains versus the Pound Sterling, the Canadian Dollar, the Swiss Franc the Australian and New Zealand Dollars. But even at maximum market panic dollar superiority was not total; the imploding yen carry trade drove the dollar down against the yen to 90 to the dollar despite the huge inward flows to US securities.

The dollar’s virtues last fall were very specific; in a catastrophe everyone’s first choice for safety was American debt. The dollar’s competitive value was not the point, only its supposed security mattered. But those conditions could not last, and as the financial crisis became an economic crisis and the threat of financial system collapse waned the fear of wholesale loss of investment principal ebbed. In moderating circumstances the funds that had been stashed in States for safety (and little or no return) began to be withdrawn seeking other more productive currency and investments.

The degree of panic into the dollar last fall guaranteed a reverse move out of the dollar; but until the recent move that began on May 20th, the euro had stayed below the 38% Fibonacci retracement level of the July to October 2008 collapse

The euro US dollar equilibrium held from mid March until mid May with the pair largely confined to the range of 1.3100 and 1.3600. The original burst through that range on March 18th and 19th was prompted by the Federal Reserve announcement that it would buy Treasury Notes in an effort to keep consumer and mortgage interest rates low; this was the so called ‘quantitative easing’ policy. The Federal Reserve Board knew that the amount of US debt scheduled for sale to the credit markets in the months ahead could undermine its low rate policy.

Mortgage rates are not set by Fed fiat but take direction from the credit markets and the most important market benchmarks are US Treasury rates. The initial market reaction to the Fed quantitative policy was extremely negative for the dollar with the euro gaining seven hundred points in two days. But despite the Fed announcement, traders seemed to forget, the market absorbed that news and the dollar regained all that it had lost after March 18th.

Enter the budget of the new American administration and their plans for the US economy. Treasury rates at the long end of the yield curve have been rising since March. The ten year note has gained 1.5% in yield in that time. The bond market clearly anticipated the impact of the government’s financing plans well before the actual auctions began. But it turmoil in the bond market did not dramatically affect the currency markets until last week.

In a classic economic comparison higher interest rates are one of the prime drivers of a currency’s worth. US rates, though not at the Federal Reserve level, are clearly headed higher but the dollar has moved from strength to weakness. Gone is the expectation that the US economy, under the spur of historically low rates and massive fiscal stimulus, will be the first industrial economy to leave the recession. Gone is the credit to the Fed’s early acknowledgement of the financial crisis and actions to mitigate the recession.

The currency market is now concerned about the US debt, about the degree of Fed quantitative easing and potential for future inflation and not about rising Treasury interest rates. There is little confidence that a government as indebted as Washington will be able to withdraw the liquidity flooding the US financial system. The may even be the suspicion that Washington will realize that monetizing the debt is probably the only politically realistic course to alleviate the debt burden

The same proactive Fed and government policies that only a few months ago were seen as strongly supportive of the US economy and the US Dollar are now the dollars nemesis. Fear for the funding needs of the Treasury, even if that fear produces higher rates, is the new driving force behind the dollar’s fall.

Joseph Trevisani
FX Solutions, LLC
Chief Market Analyst
Joe@fxsol.com

Friday, May 29, 2009

Bob Prechter: Gold is Still Money

May 29, 2009

By Robert Prechter, CMT

The following article is excerpted from a brand-new eBook on gold and silver published by Robert Prechter, founder and CEO of the technical analysis and research firm Elliott Wave International. For the rest of this fascinating 40-page eBook, download it for free here.

Have you ever traveled abroad and taken a look at the local currency and wondered how the citizens of that country could take seriously what looks like “Monopoly money?” I’ve got news for you: You’re using the same stuff. Monopoly money is the money over which some government has a monopoly. It is the currency of the realm only because the state makes it illegal to use any other type.

Promissory notes issued by a state and declared the only legal tender are always doomed to depreciate to worthlessness because of the natural incentives and forces associated with governments. A state cannot resist a method of confiscating assets, particularly one that is hidden from the view of most voters and subjects. By extension, it is unreasonable to advocate a standard for such notes, which is simply a state’s promise that its currency will always be redeemable in a specific amount of something valuable, such as gold. A gold standard of this type is only as good as the political promises behind it, reducing its value to no more than that of paper. It could be argued, in fact, that a state-sponsored gold standard is far more dangerous than none at all, as it imbues citizens with a false sense of security. Their long range plans are thus built upon an unreliable promise that the monetary measuring unit will remain stable. Later, when the government’s “IOU-something specific” becomes, as Colonel E.C. Harwood put it, “IOU nothing in particular,” reliability disappears and the arbitrary reigns. Although the populace tends to retain its confidence in the currency for awhile thereafter, the ultimate result is chaos.

The only sound monetary system is a voluntary one. The free market always chooses the best possible form, or forms, of money. To date, the market’s choice throughout the centuries, wherever a free market for money has existed, has been and remains precious metal and currency redeemable in precious metal. This preference will undoubtedly remain until a better form of money is discovered and chosen. Until then, prices for goods and services should be denominated not in state fictions such as dollars or yen or francs, but in specific weights of today’s preferred monetary metal, i.e., in grams of gold. Anyone might issue promissory notes as currency, but the acceptance of such paper certificates would then be an individual decision, and risks of loss through imprudence or dishonesty would be borne by only a few individuals by their own conscious choice after considering the risks. Critical to the understanding of the wisdom of such a system is the knowledge that private issuers of paper against gold have every long run incentive to provide a sound product, just as do producers of any product. As a result, risks would be minimal, as the market would provide its own policing. Thievery and imprudence will not disappear among men, but at least such tendencies in a free market for money would not have the potential to be institutionalized, as they are when a state controls the currency. From a macroeconomic viewpoint, occasional losses resulting from dishonesty or imprudence would be extremely limited in scope, as opposed to the nationwide disasters that state controlled paper money has facilitated throughout history, which have in turn had global repercussions. As Elliott Wave Principle put it, “That paper is no substitute for gold as a store of value is probably another of nature’s laws.”

That being said, it is also true, and crucial to wise investing, that markets come in both “bull” and “bear” types. Being a “gold bug” at the wrong time can be very costly in currency terms. For nearly three decades, gold and silver’s dollar price trends have confounded the precious metals enthusiasts, who for the entire period have argued that soaring gold and silver prices were “just around the corner” because the Fed’s policies “guarantee runaway inflation.” Yet today, 29 years after the January 1980 peaks in these metals and despite consistent inflation throughout this time, their combined dollar value (weighting each metal equally) is still 40 percent less than it was then.

It is all well and good to despise fiat money, but it is hardly useful to sit in gold and silver as if no other opportunities exist. In contrast to the one-note approach, which has had an immense opportunity cost since 1980, competent market analysis can help you make many timely and profitable financial decisions in all markets, including gold and silver.

For more in-depth, historical analysis and long-term forecasts for precious metals, download Prechter’s FREE 40-page eBook on Gold and Silver.

Robert Prechter, Certified Market Technician, is the founder and CEO of Elliott Wave International author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.