It's All About the Dollar

By: Greg Silberman | Sat, May 5, 2007
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Article originally submitted to subscribers on 3rd May 2007...

Just got back from some unexpected travels.

Thanks to all my subscribers for your patience.

Here are some random titbits from the passed few days...

Along my travels I had to make a stopover in Hawaii. It was my first time to Hawaii which reminded me a lot of another Pacific Island I recently visited - Fiji - except it had all the comforts and trappings of the US of A.

What caught my attention was the amount of Japanese tourists dropping serious cash in the multitude of luxurious Brand name stores. Wai Kiki is one giant shopping centre and the shoppers were gorging themselves on cheap merchandise.

The weak Dollar obviously has a lot to do with it. New York and other large US cities are not much different.

Personally, I think it's a shame, what the Japanese couldn't do with guns and bombs, the Americans have handed them through financial stupidity.


The way I see it.

The US Dollar, being the world's reserve currency is not dissimilar to a ball of energy.

When the Dollar falls the energy leaps off into other asset classes. And that's why we've been seeing a near Universal rise in asset prices.

But what happens if the Dollar were to rally? Would we see a reversal in the trend?

I think we're about to find out:

Chart 1 - USD bottoming?

The US Dollar is now oversold and very close to stiff resistance at 80. As mentioned below, I believe that through Central Bank collusion, currencies can be 'managed' even if they have past their expiry date. A rally in the Dollar and subsequent correction in Asset prices makes sense about now seen as most stock markets are incredibly overbought.

Just how high the Dollar will go is anyone's guess, but with interest rate differentials still in the Dollar's favour, I wouldn't be surprised to see the Dollar rally a lot higher than currently expected (the effect on Gold is not automatically negative. There have been periods when Gold and the US Dollar have risen together - 2001 for example).


An Inconvenient Truth

I recently had the opportunity to listen to one of Al Gore's Inconvenient Truth disciples in Sydney.

Al Gore, to his credit has been warning of the devastating effects of Global Warming long before it became fashionable to do so.

Now, along with his award winning movie called the Inconvenient Truth, Al has undertaken speaking engagements throughout the world and baptised speakers to spread the word.

It's a great presentation and leaves one with little doubt that Global Warming is upon us.

I asked the guy why he never mentioned nuclear power as one method of helping the problem.

His answer was that nuclear was indeed an option but "not Al's favourite". His arguments centred around waste disposal and the fact that nuclear facilitates are prime targets for Terrorists.

Hey, no argument there, but what other proven technology is going to work on the required scale?

Nuclear sure ain't a silver bullet. It has its problems, hopefully our kids will figure out what to do with all the waste (blast it into space boys!)

But there is little doubt in my mind that we're headed for a Nuclear future.

The Australian government knows it and recently removed a 25-year ban on Uranium mining. Uranium stocks with Australian exposure have been anticipating this move and have been on a tear lately.


Ok, onto the markets.

The market is indeed at a confusing juncture.

The stock market has been moving higher in an unprecedented 20 out of 21 days. Gold stocks, happy to tag along decided to diverge in April and move lower.

Whenever markets move against speculators or behave in what appears to be an irrational way, market manipulation theories surfaces.

Let's be clear, there is ALWAYS an element of market manipulation going on.

There are always bigger interests which have the fire power to influence the trend. However, the key here is that they will only be able to influence the trend for a period of time!

History has shown, one way or another, these 'sources of influence' wane and the market continues along the original underlying trend.

Now, today we have a unique situation in that we are dealing with the biggest interests of them all. The mighty Central Banks of the World.

It is an open fact that the Japanese manipulate their currency lower in order to keep exports cheap. And why not when you control the supply of an infinite paper resource.

It's also no secret that Asian Central Banks recycle their US Dollars back into the US Bond market, artificially suppressing US interest rates and by extension global interest rates. That's manipulation right?

One has to ask the question, have central bankers become so good at manipulation that they can make all asset classes dance to their tune?

Except for Gold bugs and contrarians, the world at large is bamboozled by the flood of never ending money.

So if interest rates cannot reflect economic reality and currencies are 'managed' what if anything will ever expose the truth that economic activity is largely a paper covering issue?


Maybe not, it seems that for the time being paper even trumps Gold.

No, it may be we are in for a long long period of Central Bank water torture. A slow, steady and almost invisible (managed) erosion in the purchasing power of paper money.

Yes Goldbugs, the trend is our friend but this Bull market may require the most important commodity of all - Time and plenty of it and of course a good dollop of Patience!

More commentary and stock picks follow for subscribers...



Author: Greg Silberman

Greg Silberman CA(SA), CFA

Greg Silberman

Profession: Research Analyst and Newsletter Editor
Company: Ritterband Investment Management LLC

Career Brief: Greg qualified as the youngest Chartered Accountant and Chartered Financial Analyst (CFA) in South Africa in 1998 at 25 years old. After completing his traineeship with Grant Thornton he moved to London where he worked for JP Morgan Chase in their Fixed Income Swaps Division. Sick of the grey skies and cold weather Greg relocated to Atlanta, Georgia where he spent the next 4 years freelancing as a management consultant. His targeted clients were fast growing mid size US based companies and he worked across many industries including credit cards, health insurance and energy trading. Greg has recently returned from Sydney Australia where he spent the last 2½ years working in Equity Derivative Structuring for Perpetual investments a major Australian Asset Management Company.

Greg has a passion for the markets and has been writing Greg's market newsletter for 2-years. A newsletter focused on metal and energy stocks and recently non-resource small caps listed in the US and Internationally.

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

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