Trader’s Narrative

The US dollar index is back down to the lowest levels for the year. But as I mentioned in the Politics of the US Dollar, it has yet to fall below the 2008 lows. Right now it is about 5% above that floor.

A bright side of the weak US dollar is the earnings boost it gives to US corporations with major international sales:

Source: Bloomberg

Today Geithner told Japanese reporters, “I believe deeply that it’s very important for the U.S. and the economic health of the U.S. that we maintain a strong dollar.” This is the same “strong dollar” pablum that all Secretaries of the Treasury have to peddle as part of their job.

But the unvarnished truth is that the US dollar is being sacrificed so that the US economy can continue with the least amount of structural changes. Instead of having to actually face the bloated deficits and debt racked by the US consumer and the US government, it is much easier to simply reflate your way out. The only sticking point is that this trick is an easy one and much too transparent. Almost every single developed country is racing each other to the bottom.

It is entertaining to watch from our perch as traders. But don’t forget that the stock market can defy the dollar and climb, as it has for the majority of this year. In fact, the dollar carry trade is pretty much single-handedly responsible for the rescue of the world economy from total collapse. As long as it is a controlled decline, it is welcomed.

You can either argue whether this is any way to manage an economy or realize what is going on and make decisions to profit from it.

Earlier in this month’s sentiment overview, I mentioned a lesser known sentiment indicator called the “Daily Sentiment Index” (DSI). It is compiled and disseminated by Jake Bernstein’s firm through various “proprietary data collection methods” which include internet, telephone and/or email.

Since the objective is to arrive at a contrarian signal, pains are taken to only access retail traders and investors and to avoid professional traders. Also according to Bernstein, they do their best to survey the same base as much as possible. The resulting data is available daily on major global indices and commodities without lag by 4pm the same day. Overall, it has proven itself to be a very good contrarian measure.

Here is a recent chart of the US Dollar index along with its DSI:

Similar to other, more well known sentiment indicators (such as the AAII weekly sentiment survey), a simple question is asked: are you bullish, bearish or have no opinion. But unlike the AAII survey, the DSI is a considered ‘a proprietary indicator’ and there is no detailed disclosure of its exact nature or methodology. While you might think this opacity would make people reluctant to rely on it, the DSI has a large and loyal following, especially among the institutional crowd who don’t balk at paying almost $2,000 a year for a subscription. You can get more information on the DSI at Bernstein’s website.

For some perspective, here’s a very long term chart of the US Dollar Index with the two extreme lows in sentiment:
Continue reading ‘US Dollar Sentiment: Contrarian Bullish’

By Robert Prechter, CMT

The following article is adapted 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 revealing 40-page eBook, download it for free here.

I have often read, “Gold always goes up in recessions and depressions.” Is it true? Should you own gold because you think the economy is tanking? Whenever we hear some claim like this, we always do the same thing: We look at the data.

The first thing to point out is that gold did not make a nickel of U.S. money for anyone in any of the recessions and depressions from 1792, when the gold-based dollar was adopted, through 1969, a period of 177 years. Well, to be precise, there was a change in the valuation in 1900, when Congress changed the dollar’s value from 24.75 grains of gold, the amount established in 1792, to 23.22 grains, a devaluation of just six percent total over 108 years. The government did raise the fixed price from $20.67/oz. to $35/oz. in 1934, but that action occurred during an economic expansion, not during the Depression. In 1968, gold finally began trading away from the government’s fixed price. Even then, it slipped to a lower price of $34.95 on January 16 and 19, 1970. So the idea that gold always goes up in recessions and depressions is already shown to be wrong. It did not go up in terms of dollars in any of the (estimated) 35 recessions or three depressions during that period.

What almost always does happen during economic contractions is that the value of whatever people use as money goes up as prices for goods and services fall. When gold is used as money, its value in terms of goods and services goes up. But gold can’t go up in dollar terms when gold and dollars are equated. So no one “makes money” holding gold under these conditions. It is a fine point: What tends to go up relative to goods and services during economic contractions is money, and when gold is officially money, that’s how it behaves. What we want to know is how gold behaves in recessions and depressions when it is not officially accepted as money.

Many gold bugs say that because gold was a good investment during the Great Depression, it is a “deflation hedge.” We addressed this topic in At the Crest of a Tidal Wave (1995, p.357) and Conquer the Crash (2002, pp. 208-209). At the time, government fixed gold’s price, so it didn’t go up or down relative to dollars. Gold was a haven during that time, the same as the dollar was, since they were equated by law. But gold served as a haven because its price was fixed while everything else was crashing in price during the period of deflation. Gold bugs like to claim that gold would have gone up during that period had it not been fixed, but the crashing dollar prices for all other things suggest that in a free market gold, too, would have fallen. It would have fallen, however, from a higher level given the inflation of 1914-1929 following the creation of the Fed. So gold became worth more in dollar terms than it was in 1913, which is why it began flowing out of the country. In 1934, the government finally recognized the new reality by raising gold’s fixed price. Since 1970, markets have been in a large version of 1914-1930, except that gold has been allowed to float, so we can clearly see its inflation-related, pre-depression gains.

Observe that gold’s price remained the same for a Fibonacci 21 years after the Fed was created in 1913; it was revalued in 1934. [Ed. Note: For a full chapter on Fibonacci time considerations for gold, download the 40-page Gold and Silver eBook.] Then it held that value for 35 (a Fibonacci 34 + 1) years, through 1969. So aside from the revaluation of 1934, the inability to make money holding gold during recessions, depressions, or any time at all save for the day of the revaluation in 1934 held fast for 56 (a Fibonacci 55 + 1) years following the creation of the Fed. So even after Congress created the central bank, no one made money holding gold in a recession or depression for two generations.

In 1970, things changed dramatically. Investors lost interest in stocks and preferred owning gold instead, for a period of ten years. The same change occurred again in 2001, and so far it has lasted seven years. But, as we will see, recession had nothing to do with either of these periods of explosive price gain in the precious metals.

The period of time one chooses to collect data can make a huge difference to the outcome of a statistical study. If we were to show the entire track record from 1792, gold would show almost no movement on average during economic contractions. If we were to take only 1969 to the present, it would show much more fluctuation. To give a fairly balanced picture, combining some history with the entire modern, wild-gold era, I asked my colleague Dave Allman to compile statistics beginning at the end of World War II. This is what most economists do, because they believe “modern finance” began at that time and that things have been “normal” since then. It’s also when many data series begin. So our study fits the norm that most economists use. It also provides results entirely from the Fed era, making it relevant to current structural conditions.

[Ed. note: To study the six tables revealing gold’s performance record vs. stocks and T-notes since WWII, download the 40-page Gold and Silver eBook.]

Table 1 shows the performance of gold during the 11 officially recognized recessions beginning in 1945. Although one could make a case for different start times, we took the 15th of the starting month and the 15th of the ending month as times to record the price of gold. The results speak for themselves. Even though it is accepted throughout most of the gold-bug community that gold rises in bad economic times, Table 1 shows that such is not the case.

The only reason that the average gain for gold shows a positive number at all is that gold rose significantly during one of these recessions, that of 11/73-3/75. The average gain for all ten of the other recessions is 0.16 percent, almost exactly zero. The median for all 11 recessions is also zero. If we omit the five recessions during which the price of gold was fixed, the median gain is 3.09 percent.

For long-term forecasts and more in-depth, historical analysis for precious metals, including the six revealing tables mentioned in this article, download Prechter’s FREE 40-page eBook on Gold and Silver.

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.

So Iceland is just one giant financial crater. To add insult to injury, someone even put the whole country on eBay. The listing was withdrawn because even eBay has standards.

Here’s a chart of the Icelandic Krona against the US dollar for the past few years:

There is nothing but doom and gloom in this tiny half-frozen nation. Just recently their 90th anniversary as a country was marred by protesters breaking into the Icelandic Central Bank. Things ended peacefully because, well, this is Iceland, after all.

But I can’t shake the feeling that this is actually an opportunity for a vulture-minded and deep-pocketed investor. There are many different ways to play an Icelandic recovery. I would avoid a straight play for government bonds or going long the currency (especially since there is little if no trading taking place).

Real estate would be a good alternative. Land isn’t going anywhere and neither will a building disappear. People still need a place to live, after all. Another possibility would be equities - blue chip stocks.

Argentina went through something similar in 2002 - although alone and unaccompanied by the rest of the world. But their currency did recover. From its deep slump, it rallied around 30% actually. And just recently has started to weaken again:

Of course, Argentina isn’t doing that hot right now. They were just getting back on their feet (or knees at least) when this new worldwide economic storm buffeted them again.

But I just can’t shake the feeling that Iceland will still be there a year from now, 10 years from now, and beyond. And someone will make a lot of money betting on that.