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WHAT IS THE DOLLAR AND GOLD RALLY TELLING US?
Capital flight has driven the US dollar higher. On a day when President Obama signed the Economic Stimulus Package into law, the banking turmoil in Europe and the resignation of Japan’s Finance Minister has turned investors away from other major currencies. Even though the greenback is yielding next to nothing, investors are willing to park their money with the US government as long as they keep it safe. The lack of negative game changing news from the US has been very positive for the US dollar. The greenback and gold prices have been moving in tandem since January 14th. This unusual correlation is actually sending a strong message to currency traders.
The Dollar and Gold Rally
It is not very often that we see the US dollar and gold prices move in the same direction. Since gold is priced in dollars, the value of the yellow metal tends to fall when the dollar rises and rise when the dollar falls. However this has not been the case since January 14th as the rally in the US dollar corresponds with the rise in gold prices, which closed today at a 7 month high of $970 an ounce. The last time we saw this traditionally negative correlation turn into a positive one was in 1982. At that time, recession hit many countries including the US. Although the rise in gold prices can be partially attributed to future inflation problems, the cohesive movement in the value of gold and the US dollar suggests that central banks around the world are losing credibility. There are growing concerns that a time bomb could explode in Europe leading to more troubles for the region as a whole. If that is the case, there may not be any safer form of investment than gold. The rally in the US dollar and gold is telling the market that investors are worried about global economic stability outside of the US and therefore they are preparing for the worst.
I don't know if it is of much importance but yesterday 17/Feb on a TV Thai News they were speking about the government and financial institutions in that country buying big amounts of US$ to devaluate their currency. Of course Thailand itself cannot be a major player in this game but.
At any rate, currency devaluation has emerged as a tempting option for Asian countries to maintain their economic growth. Since the beginning of this year, some countries in the region have seen their currencies substantially weakened. Weaker regional currencies might prompt some to embrace "competitive devaluation". Most of these countries depend on exports and they feel the pressure to weaken their currencies to maintain their price competitiveness amidst the current economic crisis.
Heavy euro selling tripped automatic sell orders planted just below $1.27 and the currency fell more than 1 percent to about $1.2640 , its lowest since early December.
The dollar rose as high as 92.44 yen , its strongest since early January.
Emerging Asian currencies broadly weakened against the dollar.
Originally posted by supertrot
i thought that an increase in the dollar's value was a good sign today as well; until i did a bit of investigating. if you are like me (and do not entirely understand the reason for the current economic crisis), i urge you to read the articles on the Great Depression and Black Tuesday on Wikipedia.com. The scenerio sounds all too familiar. Plus, inflating the value of the dollar decreases the buying power of Americans, especially those struggling with unemployment. Devaluation of the dollar is credited with the recovery from the depression.
Originally posted by BooBetty
reply to post by Rockpuck
I have posted a small comment before, but this article confirms what my gov't inside source has told me: the source of the buying is IN THE US! (and this is the first time ever that I have shared inside info with a forum)
Originally posted by Tentickles
reply to post by nj2day
Yeah but if this continues for along time its bad news for the world. I'm hoping its a short term thing but you never know with the stock markets these days.
Sigh... We've already determined that Denninger was overreacting.