The Euro Weakens and the Dollar – Sep. 12, 2014

The Euro Weakens and the Dollar Appears to be Stronger

My remarks concerning the dollar and gold last week turned out to be a bit premature. The dollar’s rise, fueled by the euro and pound debacles, breathed new life into US consumers via lower gas prices at the pump. Retail sales rose a respectable 0.6% in August. That excited Fed officials so much that conjecture regarding rate increases reached epic proportions. Stocks succumbed to modest losses, Treasuries were clubbed, and the dollar rose slightly, even as the metals fell in measured steps.

MWM 14, 9-12 Box ScoresOnce again, the US seems to have received another reprieve from the economic problems now prevalent everywhere else. China’s stimulus efforts came up short again this week when primary lending gauges registered below estimates for August. Manufacturing, imports, and home sales were all weaker in the region as a result. Japan’s stimulus-saturated financial system saw its GDP fall 1.8% in the 2nd quarter, and Mario Draghi was found pushing the need for his proposed QE program in the absence of German approval.

What’s interesting is that ever since Draghi pushed for QE in Europe, bond rates have been on an upside tear in both the US and Europe (see the box scores). But as we’ve mentioned here before, the world financial system has had as much QE as it can handle. With economies on the skids, the list of countries able to absorb excess liquidity is diminishing fast. What bond markets are telling us is that expectations of future inflation are on the rise, even as economies founder. This situation sets a massive liquidity trap for central banks, which US stock bulls remain completely and dangerously obliviously to – for the moment.

A quick word on the dynamics behind the metals market: All is not as bad as the price movement would suggest. The dollar had trouble advancing this week, even in the face of heightened rate talk by the Fed. Considering that the dollar triggered this selloff in gold, it’s likely that it will end it as well. And if the dollar’s awkward advance is suggestive of a top, then this spurious decline in gold may be reaching its end. Incidentally, gold inventories were seen rising even as the price fell from 1,255 – evidence that physical buyers are accumulating, albeit quietly.

We hear from the Fed next week. Expectations are for another QE taper of at least $10 billion, in addition to a more detailed scheduling of Fed rate increases in 2015. Thanks to Fed transparency, we doubt anyone (including the gold market) will be surprised by the outcome – though the stock market may be exempt from that prediction. That said, MWM has taken precautionary measures in the event that gold heads towards and breaches the 1,200 level.

Best Regards,

David Burgess
VP Investment Management