The other main event this week was the first sign that the month long U.S. Dollar rally might be running out of gas. On July 19, the $US Index fell almost a full percentage point (109.31 to 108.34)."
(Gold Commentary - July 21)
Hmmmmm. On July 28, the reverse occurred. The U.S. Dollar index rose almost a full point (0.87 to be exact), climbing from 108.65 to 109.52. In fact, over the two day period July 27-28, the Dollar index rose a whopping 1.63 points from 107.89. It would seem that Mr Clinton found time while at the G-8 meeting in Okinawa to point out that a weaker Dollar might be a bad idea. We hasten to add that there is no proof of any agreement to boost the Dollar at the G-8 meeting, but boosted it certainly has been.
We can't find any particularly good "reason" for this new found Dollar strentgh. We did notice that IPO's were still debuting on Wall Street with rises of 100 - 200%. But the U.S. market as a whole has had a very bad week. To take the worst example, the Nasdaq fell 10.5% this week. We do not see how this performance is designed to lure foreign capital into the U.S. markets, boosting the Dollar in the process of course.
On the bond market, the yield curve remains inverted. It is true, however, that T-Bill yields are on the rise. The yield on T-Bills (3 month Treasury paper) closed at 6.18% this week. That is, it must be admitted, quite tempting to anyone who regards this paper as risk free, and almost everyone does. However T-Bill yields were not rising on July 27-28, when the Dollar index took its quantum leap.
It is also true that Asian markets (notably the Japanese market in recent days) has hit the skids big time. Mr Greenspan made a speech on July 12 in which he stated that another financial crisis is "inevitable". Looking at the Asian markets, one could make a very good case that the "crisis" is here. And of course, the last time that the Asians had a "crisis", they fled headlong into Dollars and U.S. investments. Could be they are doing it again.
Whatever the reason, the Dollar is once again rising. This is despite the huge external debts continuing to be rung up on trade and current account. It is also despite the waning attraction of U.S. investment markets. It is even despite the waning attaction of investment in actual productive capacity, if the increasing disquiet over recent earnings reports is any guide. We repeat, it is significant that no sooner had all the potentates departed from Okinawa than the Dollar did a quite remarkable U turn. Coincidence? We think not.
In light of the absolute dearth of interest in the noble metal, it would have been quite remarkable for the $US Gold price to hold its ground in the face of this big run up of the Dollar. Gold did not stand its ground this week, but it didn't fall very much either in $US terms. And, of course, in terms of most other major currencies, it didn't fall at all. Speaking of "interest", check out the open interest figures above. Even more "interesting", the open interest keeps declining even though daily volume has increased. Comex trading on both July 27 and 28 totalled more than 50000 contracts, well above recent totals.
So, with the Republicans beginning their Convention in Philadelphia on Monday, July 31 (with the Democrats to follow in two weeks in L.A.), the stage is set for "politics uber alles" to overtake the U.S. between now and November. Or is it? The Fed will have their (first) chance to assert that this year it is not business as usual when the FOMC meets on August 22.
Finally, there are the Gold stocks. The XAU has stubbornly held on above the 50 level, and this week, it ceased going down. The Australian Gold index is a veritable paragon . In the past month, the Aussie index has rallied by more than 10%. On top of that, it has held nearly all of its gains in the face of a lower $US Gold price. Gold has lost nearly $US 14 so far in July. The Aussie Gold index has not lost anything at all.
There is no obvious reason for the sudden recovery of the U.S. Dollar this week. Suffice it to say, at this point, that as long as the Dollar keeps climbing, Gold will have a very hard time climbing against it. We do, of course, expand on this subject in the upcoming issue of The Privateer.