Loading...
Symbols:
Authors:

The $64 Trillion Question: What's the Dollar Really Worth?

by: Marc Courtenay September 05, 2008 | about stocks: DBV / GDX / UDN / UNG / USO / UUP    

Marc Courtenay

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

image

It appears that everybody and their cousin believes the dollar is going to stay up and be virile like a tired old man who takes his viagra every four hours.

But is the "dollar-up story" really logical and backed by sound fundamentals? How did the dollar suddenly and magically become transformed back to the solid, reliable, "reserve currency" that causes commodities from oil to gold to collapse like a house of cards?

Here's a chart on the US dollar index futures going back over 9 years. To me, it helps keep this dollar rebound in perspective:

 chart

Yes, the dollar has tanked over the past 8 years and is overdue for a bold, impressive rally. Yes, it is hurting energy commodities like Natural Gas (UNG) and US Oil Prices (USO). But there are some important facts to consider at this point.

Byron King from Outstanding Investments made these comments recently that are well worth repeating:

"And oil was rising as the dollar was falling. In fact, oil has been rising for well over a year, as the dollar has tumbled. For the currency traders, life was easy. Bet against the buck, and the Euro would rise. You saw this in gold and other precious metals as well.

"Then in mid-July, it all changed. Overnight. There was no big announcement from the Federal Reserve or the European central bank. Nobody said “We’re Tanking the Euro.” But it’s pretty clear that they decided that enough was enough. The falling dollar and rising Euro was killing exports from European countries. It was putting Germany and France into recession.

"So the central banks of the world started buying dollars. The U.S. buck strengthened. Oil fell from $145 into the $115 range. And even the Russian invasion of Georgia, or Hurricane Gustav, could not cause oil to rise. Stay tuned as this drama unfolds.

"And while you are tuned-in, don’t give up on the long-term prospects for energy, precious metals and resources. The dollar is rising? This too shall pass.

"Really, is the U.S. economy strong and getting stronger? No. Is the U.S. tax code becoming friendlier to investment and long term capital creation? No, again. Are the demographics of the U.S. labor force changing towards a long period of increasing productivity? Nope. Has the U.S. solved its problems in banking, finance, housing, energy, trade deficit, government spending? No, no, a thousand times no.

"So it’s frustrating to watch as falling oil prices, falling gold prices, falling other things take down many of the companies in the OI portfolio. But have faith over the long haul.

"Over the long haul, go with companies that own real stuff. Like oil reserves, or mine reserves, or critical technology in advanced resource industries. Go with the hard-stuff. Avoid the fluff. Or come the next financial hurricane, you might get blown away."

Barry Sergeant from Johannesburg, S.Africa and writing for Mineweb.com summed things up nicely in a way that all english-speaking investors should understand and consider:

"Amid tumbling commodity prices, global inflation fears are off the boil for now, and central bankers are increasingly under pressure to cut policy interest rates. For months, US rates have remained cut to the bone, such that rate cuts in other jurisdictions would increase the attractiveness of the dollar.

"This is bullish for the dollar, and bearish for dollar commodity prices, and further bearish for commodities as hedges against inflation, now on the wane.

"The most recent impetus for dollar strength has come from the UK, when the fallout in the domestic housing market is only gaining momentum, with highly likely dramatic knock-on effects for the overall economy.

"The Bank of England will be increasingly pressured into aggressively lowering interest rates, to limit the fallout in the overall economy, as in the US. Across the channel, the Euro zone is delivering increasing batches of gloomy economic data, thus also turning an increasing shine on the dollar."

Can all this good news and positive expectations for the dollar last until the first Tuesday in November (election day in the U.S.)? Yes indeed, but it won't be easy and there are many reasons why the dollar might lose the "viagra effect" sooner than later.

This situation is worth watching daily, and so we will let you know what we learn. As Ian McAvity suggested yesterday in his excellent report, the Market Vectors Goldminers ETF (GDX) might be worth a second look now that it's at a new 52-week low.

Keep in mind he also calls gold and silver investing akin to "javelin catching" in the current environment, so wear your javelin-proof gloves if you are going to try to average down.

Thursday morning the folks at Casey Research weighed in with these observations:

"Again, none of the money exiting the equities markets seems to be finding its way into gold, silver or platinum."

"Kitco’s Jon Nadler, always ready with his bear claws, declared that gold “appears poised to retest the $775 zone as oil has now slipped under $108 and as dollar strength is sapping the confidence among remaining” buyers.

"Even so, not all analysts are ready to throw in the towel.

"UBS metals strategist John Reade said that, “There is no doubt in our mind that gold-market fundamentals are extremely supportive for the metal at the moment, but that doesn't matter as long as the dollar is strong.”

Disclosure: Long UNG

Related Articles

This article has 24 comments:

  •  
    Sep 05 10:19 AM
    Good piece. However, I do not completely agree about the US workforce losing productivity because of demographics. Yes this country is getting older, but it is also being pushed into a position where jobs are less and less being taken for granted. When the pressure is on, people will do all they can to keep their job - harder work equals better productivity. Additionally, Mexicans' work ethic is widely known. As they increasingly immigrate into this country, this should help productivity, not hurt it.
    Reply
  •  
    Sep 05 10:50 AM
    The true value of currency is the military, political and economic power behind it. In that order.
    Reply
  •  
    Sep 05 11:10 AM
    I have also concluded that USD is a military-backed currency.
    Reply
  •  
    Sep 05 11:10 AM
    So has Putin, by the way.
    Reply
  •  
    Sep 05 01:01 PM
    Just stop this.

    Commodities and traded currencies were in a bubble. The bubble is popping.

    EUR $1.30 is where we're going at least.

    Get used to it.
    Reply
  •  
    Sep 05 01:30 PM
    putin is bully military power backed by high energy prices, he is using energy to blackmail europe.

    but USA is established and respected military and economic power, which already has strong base in middle east, and has allies all over the world.
    Reply
  •  
    Sep 05 01:54 PM
    The military idea is pretty ridiculous.

    There are many places you can go in the world where the American military has never been and will never be and you can buy things there with your dollars.

    Reply
  •  
    Sep 05 06:35 PM
    You are long UNG? And I'm long UUP. Let's see how it plays.
    Reply
  •  
    Sep 05 11:49 PM
    Marc,
    Thanks for putting the strong dollar psychosis in perspective. And you did it without even pointing out that we are the world's biggest debtor nation, whose only salvation plan is printing more paper.
    Reply
  •  
    Sep 06 09:39 AM
    Our strong military is over stretched. Plus, there are other countries that have considerable miltary hardware that we would be hardpressed to defend. As an economic power, we are quickly dimming with all the debt we have floated. Too many countries (China, Saudi Arabia) have a ton of dollars that could be used against us. We desperately need to stop buying today and letting someone else pay for it tomorrow. Kinda like that big stimulus package last Spring.

    On Sep 05 01:30 PM techy wrote:

    > putin is bully military power backed by high energy prices, he is
    > using energy to blackmail europe.
    >
    > but USA is established and respected military and economic power,
    > which already has strong base in middle east, and has allies all
    > over the world.
    Reply
  •  
    Sep 06 12:36 PM
    It is not just the large banks of Europe buying $$, Brazil jumped into buying $$, as many as their central bank could afford for over 3 months now. Not sure what they were doing, as now they are starting to sweat along with all the others. With regards to military, we have half the fleet spread between Black sea and the middle East. Three carrier groups and soon there will be four near next door to my station. And there are other countries adding their sail boats to the mix as well.
    Reply
  •  
    Sep 06 01:00 PM
    You may also add that China wanted a stronger dollar, and a weaker yuan, while limiting inflation. When that impossibility did not occur...

    www.chinadaily.com.cn/...

    What could they do? Close factories for two months after stockpiling commodities, deflate commodity prices through a demand destruction coupled with the U.S., buy U.S. dollars like all of the world's central banks (with their stronger currency), meet with Paulson concerning holdings in treasuries and FNM/FRE, ensuring both are backed by the U.S. government, and ensure that their GDP rises at least 8% while preventing their own version of a wage inflation spiral. This global economy idea has a lot of moving parts, many of them counteracting. Good piece and thanks for mentioning the Central Bank USD buy-up.
    Reply
  •  
    Sep 06 01:08 PM
    One more thing. You might mention the Bank for International Settlements and how important their actions are with regards to currencies and commodities.

    www.bis.org/dcms/fl.js...
    Reply
  •  
    Sep 06 02:22 PM
    Perception. War Premium for a Dead Beat economy's currency. A debtor nation which does not have the means to repay its loans. A service centered economy which has entered a long period where service outsourcing will again accelerate because of dollar strength.

    Without a strong military, the Dollar would be cratering further. (Central Bank Intervention has been tried often and has failed every time.) Military Power is measured in the numbers of ground troops only for those countries without Firepower. Fire Power, we have in Spades.
    Reply
  •  
    Sep 06 02:43 PM
    How The Plunge Protection Team Fights Back (Been Documenting Their Actions or What I Believe Are Their Actions...They're Brilliant, No Kidding....) Next Predicted Step: The Fed cuts rates.

    What? How? Let's go back to October 2006, when Paulson reassembled the PPT. Paulson repeatedly visits China, to lay out the plan. China stops their factories (in 2008, they did this from mid-July to mid-September, "for the Olympics") commodity prices come down, US "demand destruction" helps to further collapse commodity prices, US government freezes the ability of traders to "short" certain key financial companies, the SEC changes rules regarding commodity trading (due 9/15/08), as well as specifically targeting oil speculators. The CBOT coordinates with large financial institutions to short silver and gold, while the Bank of International Settlements and other central banks, flood the market, by selling off their gold reserves (they'll buy them back later once the market collapses). The US government then shows support for highly leveraged (50-1 capital ratio) "hybrids" like Freddie Mac (FRE) and Fannie Mae (FNM) to prevent a collapse of the real estate/banking markets. Since foreign countries own large amounts of these stocks, they cooperate by helping strengthen the dollar. They are also further held hostage to the strong dollar because their economies are in recession without a buyer of their exports. Commodity deflation and the strong dollar now allows continued Fed rate cuts without inspiring "wage spiral" inflation seen in the 1970's (helps not to have those pesky, strong unions around anymore). Commodity hedge funds implode, further helping to push commodity futures downward (steel, copper, oil, silver, gold, etc.)
    Reply
  •  
    Sep 06 05:09 PM
    most of the above commentary was true/stated about most empiric communities since many years BC. for reasons common to those offered above, these same have come and gone[some would say, risen/fallen].

    this all reminds me of words by Cicero in 50 BC-- "... we owe too much to foreign states....we consume too...our savings ...poor. etc etc.... what is it about--"the past is prologue...?

    wise man[Yogi Berra]--deja vou all over again?!

    sign me-- GERRY MANDER
    Reply
  •  
    Sep 06 09:36 PM
    Once again your comments are exceptional. Thank you...and I too believe an interest rate cut might be coming quickly because everything is beginning to smell and look deflationary (of course that's an illusion) and we know Chairman Ben does not like deflation. I can just hear his helicopters revving their engines...know what I mean?
    Reply
  •  
    Sep 07 04:33 AM
    Let's play this out if interest rate is cut to say, 1.75%.

    If I am a major holder of US$, I would probably want to seek out higher returns, or buy something of returning value with my depreciating dollars. Better yet, store their wealth in precious metals or assets in high demand like oil or within the energy value chain.

    Who are the major holders of US$?
    - Saudis
    - China
    - India
    - Japan
    - Singapore
    - EU

    I think we will see a lot of these dollars coming back to America - HYPERINFLATION!!!
    Reply
  •  
    Sep 07 08:00 AM
    The biggest threat of US dollar is the national debt. I am not sure why you didn't mention it in your article.
    Reply
  •  
    Sep 07 08:29 AM
    A Japanese style Bank implosion is still possible since our Financial Institutions insist on playing Shell games with their "Assets". They are afraid to Bite the Bullet and continue to place their hopes on the suspension of the FASB's Mark to Market Rule.

    The longer this continues, the greater the chances of another few cockroaches appearing.

    Mutual Funds are going to start their Annual Sales to meet their distribution requirements. Insurers will have to raise funds for liabilities incurred this Hurricane season. Financial Institutions are raising capital however they can, going wherever they can, from asset sales to sales of themselves. None of these bodes well for the Stock Market, toss in dollar strength, declining commodity prices and a new weakness in the Tech Sector, what were the last bastions of strength in the S&P are gone.

    I have seen sundry Bull comments about "since we were the first to experience weakness, we will be the first to climb out." Global Strength emerged in the Emerging Market Sector and led the Developed World upward. Weakness there has led to Developed World declines. As a service based economy, we are dependent on expansion elsewhere. We will be amongst the last to recover.

    A stronger dollar will not bring our Manufacturing Complex back to life, we are Dependent on Foreign Oil...definitely. We are also dependent on all of the Manufacturing Facilities whch are no longer on US soil.
    Reply
  •  
    Sep 07 01:18 PM
    I couldn't agree with you more, paultaut.

    My take is, since folks in Asia are bigger savers, and as their economy expands, they will want a lifestyle more like ours' in the US and Europe. I think there will be more intra region trade in Asia. These countries will divest from US dollar in the long term. I just doesn't make sense to hold on to a perpetually depreciating currency.

    Also I am sure they are keenly aware that the US has an increasing aging population, just like Europe and Japan. Therefore consumption will be shifting, and a net divestment in the stock market will occur. Their net investment strategy will be adjusted downward accordingly.

    I believe the rest of the world will be increasingly reluctant to finance our trade deficit after seeing our gross mismanagement in the financial sector, irresponsible government bailouts, and a general population of net spenders instead of savers/investors.

    As a nation we had achieve much, and rightfully we should be proud of it. However, over the years we had been prideful in our ways. Look at the government, we think we can solve the financial fallout by manipulating the market through artificially holding interest rates and injecting liquidity into the economy (i.e. encouraging spending). Our energy policy is to send our troops (children) to middle east to 'secure' oil there. We think the rest of the world should [rightfully] finance our lifestyle, because if they don't they will not have jobs - how laughable!

    You know the age old saying:

    "Pride comes before a fall"

    I think this fall is coming, and it will be a hard one.

    SOLUTION:
    1. Smaller government, lower taxes
    2. Get rid of the Federal Reserve
    3. Start saving more
    Reply
  •  
    Sep 07 04:05 PM
    U.S. has a strong military? You have got to be kidding me. George and Dick have squandered it in Iraq, We're over extended, the equipment is getting used up, and the troops are on their 2nd, 3rd or even approaching their 4th deployment. Recruitment is down, and where it is up, they are taking in those with only 1 conviction, and lowering the standards for education. We are spent. Printing more 'paper' money is the only thing keeping us alive. We couldn't take on another war like against Syria or Iran without massive investment of our own capital (people, new equipment, etc ).
    Just my own humble opinion, but with Cheney talking WAR over in the Georgia and Ukraine, Putin knows we don't have the muscle to back up his pronouncements.
    Good Luck, we'll need it.
    Reply
  •  
    Sep 08 12:52 AM
    The only thing that can save us is the mercy of God.
    Reply
  •  
    Sep 10 06:51 AM
    As stability in Asian countries and Russia and South America decreases, they shift their liquidity from local to dollars as they have done for decades.
    Fe: Thailand, Russia,

    That is what is helping the dollar, once the balls started rolling
    Reply
More Comments on UUP ยป
More by Marc Courtenay
Investment Resources
Money Managment
Research
Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Oil Price
Gold Price
Metal Miners
Commodities