Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

US Dollar Forecast 2008 - Determines Trend for Stocks, Bonds and Commodities

Currencies / US Dollar Dec 28, 2007 - 02:54 AM GMT

By: Greg_Silberman

Currencies

Best Financial Markets Analysis ArticleIt's all about the Dollar (again)
Even to the casual observer it's now apparent that the financial world is one giant see-saw. On the one side of swing is the once Almighty Dollar and on the other side is every other investable asset class.

Wherever the Dollar goes in 08, stocks, bonds and commodities will head the other way.


Call it the liquidity trade, call it the end of the Dollar, call it what you like but the long held truth of inter-market analysis has been superseded by one factor and one factor alone – what's the Dollar doing?

Since 2003 we've seen all asset classes rise in tandem whilst the Dollar fell. Once upon a time we were accustomed to simpler logic such as rising commodity prices were inflationary and caused higher interest rates and a lower stock market Or Gold is a counter-cyclical investment that does well when other asset classes such as stocks are falling. That kind of logic no longer seems to hold.

It seems the Dollar has so much value stored up inside it that when it falls its like the sun throwing off a mass of energy in its wake.

But the Dollar like all other markets doesn't fall continuously (even if it should fundamentally) and when it rises, however small, it sucks back a portion of the value it has given off, causing stock markets, commodities and even non-sovereign debt to plummet in value.

Thus we would say to the causal market observer, if you want to know how to make money in this environment, all you need to know is essentially whether the Dollar is rising or falling. And if it's falling, buy the asset class you're most familiar with be it real estate, stocks, debt, art, antiques etc.

So where is the Dollar headed?

Chart 1- US Dollar (top) vs. Real 3-month interest rates offset 1 year (bottom)

Most Economic 101 classes teach that the exchange rate between 2 countries is calculated as the interest rate differential between them. For example if country A yields a real rate of return of 4% p.a. and country B 3% p.a. then over time money will move from the low yielding country B to the higher yielding country A and the exchange rate improve in favour of country A.

We attempted to do the same thing by calculating the ‘real' rate of 3-month treasury bills by comparing them to the price of Gold (bottom). We then noticed an interesting correlation. By offsetting the real rate on 3-month bills against the US Dollar by 1 year we could predict the trend in the Dollar for the following year.

Correlations are never perfect and tend to fail just when you need them most, but this record is impressive. For example, the real rate of interest turned higher in 1994 and the US Dollar made a sustained move higher in 1995 (red rectangle). Or how about the MAJOR turn in the Dollar in 2002? That was predicted a year in advance by the turn in real short term rates.

The current situation is fascinating because the real rate of interest plummeted this year (3rd red rectangle) as short interest rates plummeted and Gold challenged generational highs. If the correlation continues then the Dollar is in for more downside in 2008.

Our expectation is that the current rally in the Dollar will finish at its green downward trending line and its 50 day moving average – both at around 80. Thereafter we foresee the Dollar falling to all-time lows and correspondingly a strong stock, commodity and even bond market in '08.

More commentary and stock picks follow for subscribers…

By Greg Silberman CFA, CA(SA)
Profession: Portfolio Manager and Research Analyst
Company: Ritterband Investment Management LLC
e-Mail: greg@goldandoilstocks.com
Website: blog.goldandoilstocks.com

I am an investor and newsletter writer specializing in Junior Mining and Energy Stocks and small caps listed in the US, Canada and Australia.

Please visit my website for a free trial to my newsletter http://blog.goldandoilstocks.com

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.  

Greg Silberman Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Ricardo
04 Jan 08, 08:56
So where is the Dollar headed?

I was lookign at the correlation and it is quite impressive but I have one question, is it possible for the dollar to rise during the presidential elections on the U.S.?


Post Comment

Only logged in users are allowed to post comments. Register/ Log in