Sunday, August 10, 2008

Do you want to go to London?

In early June I predicted that by mid summer we would see crude oil at about $100 a barrel and Gold around $850. As of Sunday, August 10, we are almost half way through the summer and both oil and gold are within $15 dollar of my target price. I still have 11 days to go and I might just hit the target.

In another posting I suggested that I thought that the dollar would recover. As the price of oil and gold has come down the dollar has risen. I think there are a great many hedge funds and dealers that are short the dollar big time. I also believe the traders and short sellers are finding it hard to cover their short position and in turn go long the dollar because they are wed to the short dollar position; they just don't believe what they are seeing on the tape.

We could see a spike up even greater than the one that occurred over the last few weeks as traders scramble to cover their short position and go long. Many of you may be asking yourself why the strong recovery in the dollar? The markets were expecting the Fed to increase interest rates and with the payroll decline there was no way the Fed can increase rates. On the surface it would appear that this lack of movement by the Fed would have caused the dollar to decline. The reverse happened and the dollar strengthened. Why?

The other central banks around the world are just now beginning to deal with the problems of falling real estate prices and loan defaults. The major industrial countries find that their economies are starting to falter. The world is just now beginning to experience what the US has been going through over the last 13 month. Central bankers find themselves between a rock and a hard place. The Fed is saying we are standing pat and the foreign bankers find themselves in the position that they will have to lower their interest rates to try and stave off a recession. With the spread narrowing between the US Dollar and the rest of the currencies people will want to have their money in the dollar.

The other issue for me about the dollar is the decline in some stock prices in the second half of 2008. As the dollar declined those companies who were multinational in nature saw earnings increase because of exchange rates. With the dollar falling against the euro companies that got paid in euros and then converted the earnings back into dollars had inflated earnings. I expect that with the current strength of the dollar we will see third quarter earnings affected by the increase in the value of the dollar.

Being a global economy the impact of the changing dollar will have serious implications for many economies throughout the world. I will share with you two examples of how much the dollar has increased in value. In May of 2007 my wife and I were in London and at that time the value of the pound was $2.12 to one pound. As of Friday the value was $1.9212 to the pound. The second example of change is the Canadian Dollar. Six month ago the value of the US Dollar to the Canadian Dollar was $1.05. As of Friday the value was $.9240 to the Canadian.

This may well be the beginning of a significant reversal in trend that takes the pound to $1.75, the Euro to 125 and the Yen to 125. I did pretty good predicting the price of oil, gold and the dollar.Lets see what happens. Perhaps it is time to begin to make travel plans to England and Europe.

Dan Perkins

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