The U.S. dollar is falling because it is fundamentally dishonest money. But rather than prove that today, we’ll begin with a man sleeping soundly a camp cot at a mining site in Botswana and show why his visit – and the opportunity he was investigating – is tied directly to the dollar’s dishonesty.
The man is Dr. Alex Cowie, or Dr. Stock as we call him around the offices when he’s here and not chasing up some geologist over coffee in the CBD. You may know him as the editor of Diggers and Drillers. For the first time in a month we had the chance to catch up last night in a quiet office and talk about what he saw in Africa. He’s been a busy man since, then, visiting a small silver company in Queensland and pounding beers/comparing notes with the miners at the Diggers and Dealers conference in Kalgoorlie.
“I wouldn’t say it was uncomfortable but there isn’t much luxury at a mine site. I had spaghetti hoops for dinner (warm), and slept in a tent on a cot. The one nice luxury was a hot shower heated by a log fire,” he told us.
It’s our experience that companies looking for favourable coverage from an investment writer don’t spare many expenses. They will break out the liquor, five-star dinners, and late-night company if necessary. But those companies are usually more interested in self-promotion than opening a mine and running it profitably.
Poor old Alex ran into a serious company with a serious proposition, so there was no drinking on the mine site and certainly no prostitution. The company paid for transportation to and from the site, the aforementioned spaghetti hoop dinner, and the luxury of a hot shower. He came back impressed with the operation and the cost-consciousness of the management team, and grateful for the independence that comes with being able to investigate the stories you want and report on them honestly.
Your editor tends to take a top-down view of investment markets. We told Alex earlier this year that he’d have the hardest job at the company. Inflation…deflation…bubbles…busts…the RSPT…the MRRT…all of these make it very hard to forecast sustainable commodity price trends and then suss out which Australian companies are actually ready to profit from them today.
But so far so good. For the full story on how he does it, you’ll have to read about the BMAC Filter. And if Alex’s research is as promising as it looks (and has been recently) the companies he’s recommending could do well right away, given the chat we’re about to show you.
A big factor in the immediate fortunes of resource investors will be the direction of the U.S. dollar. And to provide you with some crude insight to that, check out the chart below we made this morning. It’s a ten-year chart of the U.S. dollar index with a 50-day moving average (the blue line) and a 200-day moving average (the red line). You’ll also find red circles every-time the moving averages cross.
What does it all mean? Well, we should first say why we bothered building the chart in the first place. The obvious answer is that oil is above $80 and gold back above $1,200. Both of these qualify as “not dollar” trades. That is, the strength in commodity prices, lately at least, is as much about a weak dollar as it is strong commodities.
For example it is hard to argue that oil should be going a lot higher for fundamental reasons. By “fundamental reasons” we mean economic growth worldwide. If Japan, America, and Europe are struggling their way out of low growth, would you expect the demand for energy to grow?
And if you think China is going to make up the difference, think again! Yesterday’s surprising news, which was negative for Chinese stocks today – is that China has ordered 2,087 factories, steel mills and cement producers to close for using energy inefficiently. Does this make you wonder, by the way, if production in China could fall dramatically much more quickly than anyone expects? If the State has been subsidising inefficient producers for the sake of employment, and then suddenly decides to shut them all down, how much industrial activity will be sustainable (profitable) without State support or with real energy prices?
But back to oil and the dollar. If oil is rising partly because the dollar is falling, how much further will the dollar fall? The flipside to that, which we won’t take up today, is how much further will oil and gold rise? But to the chart!
Over the last ten years, there have been 11 times when the 50-day moving average crossed the 200-day moving average. When the 50-day MA crosses above the 200-day MA it is generally bullish. When it crosses below, it’s generally bearish. This is all from a technical perspective and does not reflect in any way our confidence in the dollar’s fundamentals (we have none).
The chart below shows that the dollar index had declined to the point where it trades at its 200-day MA of 80.71. The 50-day MA is still considerably higher than the 200-day MA but has recently turned down. That said, in early 2009 when the dollar index crossed below its 200-day MA, the 50-day MA turned down viciously and the rout was on. This coincided with the big run in “risk assets”, commodities, and global equities.
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An armchair chartist/trader might see bigger commodity moves in the offing on further dollar weakness. You’d have to assume that something would cause that weakness…something like higher unemployment, falling house prices, and more quantitative easing from the Fed. But assuming your assumption was right; would you have a trade based on dollar weakness?
We put that question to our professional trader and chartist, Slipstream Trader editor Murray Dawes. As is his wont, he replied with his own chart and the commentary to go with it. You’ll find both below. As you’ll see, Murray is one of those rare breeds who combines a trader’s mentality with a big-picture understanding of the economy and the market. It’s a weird hybrid that we don’t encounter often, like the Platypus (both reptile and mammal), but it works!
“To gain a better insight into what are the key levels in the US Dollar index you actually have to go back further in time,” Murray begins. “This is a weekly chart of the US Dollar index going back 25 years. It is quite clear when looking at this chart that the 78-81 level in the US Dollar index is incredibly important. There have been five major lows created between 78-81 since 1990. I would expect to see an intermediate low created in this zone in the next few weeks. This would correspond to my expectation of seeing an intermediate high in the Equity markets in this time frame.”
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“Currently the short and intermediate trends are down with the US Dollar index below its 10 Day MA and the 10 day MA below the 35 day MA. But as long as the 10 week MA remains above the 40 week MA we have to say the US Dollar is in long term uptrend. Therefore we are in a situation of a long term uptrend and a short and intermediate downtrend.”
” In this situation you are looking for a low to be formed and a resumption of the uptrend once the short and intermediate trends turn back up. This will not occur until the 10 day MA has crossed over the 35 day MA to the upside. That would not occur until the price had recovered to c. 83. Also the 200 day MA is currently at a price of c. 82. We really need to see a bounce in the US Dollar index to above 82-83 before we could become bullish on the index.”
“It is far too dangerous to try and short the US Dollar index here while it is so oversold and so close to very major support. The smarter play is to be patient and wait for a reversal signal in this 78-81 area and then ride the short squeeze.” To read more about Murray’s trading method, you’ll have to know more about the Slipstream Trader.
As for the dollar being weak short-term but strong longer-term, that makes sense to us in a world of relative values. A weak dollar is the victim of unsound money and traders anticipating more quantitative easing by the Federal Reserve (although not as soon as tomorrow’s Federal Open Market Committee meeting). A stronger long-term dollar would have to be the beneficiary of more euro weakness related to more Euro debt woes.
The euro debt woes are off the boil. The American economy woes are on full boil. Tomorrow, we’ll boil away all the extraneous issues and define what honest money is, why we don’t have it, and what you should do about it. Until then!
for The Daily Reckoning Australia