Eric Roseman's Eruptions: Stocks, Global Markets and Commodities BLOG

The View from Cabo

In-Transit in Dallas, Texas

Gold was the buzzword at the Sovereign Society's Offshore Academy last week. And nobody is more bullish on gold than me. The majority of money-managers and bankers from Europe were generally bullish on gold while some expressed concern after a big rally over the last four weeks.
 
My view is that any correction should be interpreted as another in a long series of opportunities to accumulate gold in the age of violent capital markets, skyrocketing U.S. and Western government deficits and broad-based currency devaluations across the world.
 
Gold, though overbought near-term, remains in a formidable uptrend; I would, however, avoid making fresh investments into gold mining stocks after a stunning 165% rally since last fall. Wait for a pullback before buying gold stocks again.
 


 

When asked at Cabo San Lucas, Mexico, whether now is the "right time" to buy gold my reply was to apportion 50% of your allotted target right away and the balance on any impending correction. The market might run away from here -- though I highly doubt it because everyone is too bearish on the dollar and the buck should muster a violent but powerful short-term rally.

I would use this opportunity (dollar strength, however short-lived) to buy more gold, silver, the Norwegian kroner, Canadian dollar, EUR and Aussie.  
 
News last week that the Indian central bank purchased 200 tons of gold from the IMF sent prices sharply higher again -- gold crossed the $1,100 mark intraday on Friday before pulling back to close at $1,095 an ounce. This morning, gold trades at $1,109 an ounce.
 
Though the Indian central bank is buying gold at these levels, they're defying the broader trend in Indian fabrication demand, which has collapsed since $750 gold last year. The majority of Indians, the world's largest consumers of gold jewelry, aren't lunging after gold at these prices.

Traders commenting in an editorial in the Financial Times last week believed India's $6.7 billion dollar purchase was the largest by a central bank in more than 30 years. Other central banks are likely to follow.
 
Clearly, global investment demand for gold is booming as investors, institutions and central banks in Asia accumulate gold at the expense of the IMF and heavily indebted Western nations. 

I expect this trend to continue for many years as we witness the greatest transfer of wealth from West to East, marking the end of Anglo-Saxon global financial domination after nearly 300 years.

Decline of the Dollar

- Dugald Malcolm

Montreal, Canada

Earlier this month while writing about gold, I posted a chart of the U.S. Dollar Index to demonstrate the abysmal state of the U.S. Dollar. The index is valued relative to a basket of currencies, including Euros (57.6%), Japanese Yen (13.6%), British Pound Sterling (11.9%), Canadian Dollars (9.1%), Swedish Kronor (4.2%), and the Swiss Francs (3.6%).

The chart I posted, similar to the one above, shows the downward trend line that has plagued the dollar since early March. I also made reference to the Death Cross of the moving averages that occurred in June. This does not bode well for the dollar, which continues to push its way lower. What's more, it still has room to move lower; I have included possible levels of support on the chart above at 74 and again just below 72, a low made back in spring of last year.

While this short term downward trend is dismaying, it becomes downright scary when we realize that this is not a new story. If we go back over six years ago, to the beginning of 2002, we see that the dollar index began its medium term downward trend as defined by the chart below.

It becomes absolutely nauseating, however, when we go back even further. The next chart goes back a quarter of a century, all the way to 1984, where we see an even longer term downward trend of lower highs that has been in place since then:

This staggering decline of the dollar has brought about a new reality for nations and their foreign reserves. According to data from Barclays Capital, countries around the world have put 63% of their new cash reserves into Euros and Yen during the second quarter of 2009. This represents the highest level it has ever been in any given quarter. The 37% of cash reserves that the dollar now comprises is the exact opposite of what it was 10 years ago, when it, not the Euro and Yen, represented 63% of total reserves.

While I have used the dollar's depreciation in my case for having gold in one's portfolio, the same case can be made for foreign currencies as well. Astute individual investors should follow the example of the central banks and make currency diversification a part of their portfolio - including, of course, gold. In fact, we have doubled our gold exposure for our managed accounts since last week on possible further dollar weakness.

Have a good weekend!

The Next Currency Crisis?

Montreal, Canada

Is the EUR a suitable alternative to a falling dollar? Are other currencies any better?

Over the last decade a record number of central banks worldwide have reduced their exposure to U.S. dollars while raising their allocations to the EUR and to a lesser extent, the Japanese yen. According to a recent report from the IMF, central banks today hold about 63% of their total reserves in dollars – a record low.

 

Since it was introduced in 1999, the EUR has gained a cumulative 28% versus the American dollar; the buck has also declined against every other major and peripheral currency in the world. Only once this decade has the dollar rallied – in 2005.

Current trends among central banks might be feeding a dollar bear market or likewise fueling a gold bull market.

Central banks are notoriously infamous for buying and selling currencies at the wrong time. This is also true regarding gold when dozens of banks continuously dumped the metal in the latter half of the 1990s – just as prices formed a bottom. In fact, central banks are among the worst market-timers – and not just the major central banks.

Banks in the oil-wealthy Gulf began aggressively buying dollars in 1999, 2000 and into 2001 just as the buck was completing a multi-year bull market that began in 1995.

Probably the shrewdest central bank is the People's Bank of China, who recently admitted in late April to holding twice as much physical gold in its coffers than officially reported to the World Gold Council. China, Russia and several other emerging market central banks are buying gold while advanced economy central banks have sold most of their stash – except Germany and the United States.

Are the emerging market central banks wrong to accumulate gold? I doubt it. But they might be wrong buying the EUR and yen – an admission they might be forced to make in the absence of a suitable dollar alternative with abundant liquidity.

Why is the EUR such an ideal alternative to the dollar? Despite being the second most liquid tradable unit in the world does it really deserve to be at current levels? The answer to that question is a resounding "No."

In August, the euro-zone's trade balance swung to a deficit from a surplus in July after exports plunged to their lowest levels in 4 ½ years. Budget deficits are already heading through the roof across the region – even in Germany.

The original guidelines of the Maastricht Treaty, which strictly defines budget deficit limits to 3% of GDP has been breached by most members in 2009. Though not a profligate as America, the Europeans are printing mounds of cash to desperately grow money-supply and inflation. Thus far these policy initiatives have failed.

If the EUR is such a great alternative then why is it plunging vis-à-vis the Brazilian real (-20%), the Australian dollar (-16%), Norwegian krone (-13%) and 8.5% against the Canadian dollar? Is this simply because commodities have surged since March? And against gold the EUR is dropping again, down 13.6% this year.

The EUR is not a great alternative to the dollar. The fundamentals for the single currency are poor and the prospects for devaluation are growing by the day; the lower the dollar falls, the higher the risk one or two single currency participants will leave the EUR or break from the currency grid. These include the Italians, the Greeks, and possibly the Portuguese.

The EUR is a mish-mash currency plagued by poor domestic consumption, rigid labor laws, high production costs across the region and a banking system that still starves capital. It's also wrestling with a massive leveraged buyout of Eastern Europe this decade, which is still unraveling. Yet it seems the foreign exchange market has not assigned a risk rating to this outlook; EUR investors are delusional.

Jim Rogers, one of my mentors over the years and probably the smartest global investor along with George Soros and Julian Robertson since the late 1960s, once told me the major currencies (USD, EUR, Yen) are like a "bunch of drunks at a bar, all intoxicated by rising debt and competitive devaluations; they're all no good." He was spot on. That phrase stuck with me since he first uttered those words in an interview back in mid-1995.

The EUR might be better than the dollar – almost anything is. But what does this really say about the EUR and other currencies? It says the global exchange rate mechanism is badly fractured, largely dysfunctional and prone to high inflation over time as paper money buys less and less as per our wages. It's truly a sad story.

All currencies are now in a downtrend versus gold since 2005.

Gold, and to a lesser extent, silver and oil, are ideal hedges against all currencies. The EUR is not a haven and is vulnerable to a crisis over the next several years. It's unlikely the single currency will survive without a severe devaluation – especially if the dollar remains weak, punching a hole into her exports at the very moment the region is desperate for economic growth.

Paper Money Losing Credibility

Montreal, Canada

Earlier this year I reduced my gold exchange-traded-fund holdings by 50% around $950 an ounce as I anticipated another deep correction for risky assets. Though a decline followed, gold prices recovered quickly and I admitted to making a mistake. I regret not keeping that position.

However, I did buy gold stocks last summer – a Canadian dollar denominated ETF – and I'm quite pleased with its performance over the last few months. But owning gold stocks is not the same thing as owning gold. Often, investors confuse these assets forgetting that historically deviations have occurred when gold prices have rallied while gold stocks have simultaneously declined and vice versa; I believe investors should overweight bullion and underweight the mining stocks.

My take on a correction back in May was that stocks were in the midst of another bear market rally and would succumb to profit-taking once more; a stock market sell-off would take commodities, including gold, sharply lower and the dollar higher. That never happened.

I plan on doubling my gold holdings today for managed accounts and funds in Europe and the United States. I don't think we'll see $1,000 or triple-digit gold prices for the next several years – if ever again. Even if we do, prices won't stay at those levels for long. Any correction in gold prices should be viewed as an opportunity to buy more of the metal – something I failed to do last spring. I won't make the same mistake twice.

As an investor or money-manager you must be prepared to accept risk. Otherwise, there's no reward and in the absence of some volatility your returns over time will be dull and uninspiring financially.

If you assume risk, then you'll make mistakes. No investor in the history of the world has ever called every trade – we all make mistakes. The way to succeed is to limit your losses (stop-losses) and keep the biggest speculations small as a percentage of your total portfolio.

Gold, however, which is inherently volatile, is now the only real money in the world capable of protecting our purchasing power. It deserves a core allocation in your portfolio.

The Federal Reserve as bastion of the world's reserve currency is on a course to print money like never before following its "quantitative easing" program last year – basically a fancy term that means "print or die." The Fed is out of control and really has no exit strategy to reign in all this massive credit creation; interest rates will stay low for a long time or until employment accelerates again.

The odds highly favour a major spike in inflation over the next few years – probably the worst inflation since the 1970s. Governments need inflation, a monetary phenomenon that remains in short supply since mid-2008 as real estate, bank lending, credit growth, wages, financial assets and oil all remain well off their highs.

The dollar and other currencies for that matter will continue to decline vis-à-vis gold for the foreseeable future because nobody wants a strong currency. Almost every central bank is printing money and since all markets are highly correlated in the age of violent capital markets, there's isn't a single currency that stands to protect your wealth – not the dollar, not the EUR, not the CAD or the yen. Not one. They're all no good.

So here I go again. I'm buying more gold today. I just can't see a better alternative as paper money continues to purchase less and less against gold since 2005.

The 1930s, Rising Taxes and Gold’s Confiscation

Montreal, Canada

Did a surge in individual and business taxation in the 1930s exacerbate the Great Depression? If so, the trend in state and federal government taxes isn't friendly to an economy that remains badly fractured by weak credit demand and rising unemployment.

In yesterday's Wall Street Journal (page A25), Arthur Laffer (Laffer Associates) makes a strong historical case about taxes, the Great Depression and comparisons with today's economic challenges. His findings make for a sobering read.

If he's right, we're heading down the wrong path over the next two years as tax rates rise significantly following the expiration of the Bush tax cuts in 2011. And raising taxes in the middle of a recovery is not the way to build prosperity. The late President Reagan knew that but Obama lives on a different planet.

According to Laffer, "The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I'd give to all who will listen, it is that U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s."

Laffer also goes on about gold and how government confiscation of the yellow metal in May 1933 blew deflation fears wide open as the public flocked to gold; the metal was fixed to the dollar at $20.67 an ounce. Fears of a dollar devaluation vis-à-vis gold unleashed a gold-buying panic by mid-1932. U.S. consumer prices plunged a cumulative 27% from late 1929 until early 1933.

By early 1933, the federal government under FDR declared a bank holiday prohibiting U.S. banks from exchanging dollars for gold; the public was not permitted to exchange foreign currency, either. If you held gold, most of it was to be handed back to the government at the official rate of $20.67 an ounce; by January 1934, however, the government revalued gold at $35 an ounce.

Says Laffer, "In less than one year the government confiscated as much gold as it could at $20.67 an ounce and then devalued the dollar in terms of gold by almost 60%. That's one helluva tax."

Meanwhile, dollars were apparently in short supply last year as the credit crisis blew wide open. Or were they?

The same fears didn't play-out last year as the financial system almost collapsed.

From July 2008 and until March 2009 the dollar went through the roof in what is widely believed to be a "flight to safety" amid outright panic. But I don't buy that. The dollar rallied because de-leveraging was in full force coupled by massive redemption requests from global investors as they dashed out of risky assets and headed almost overnight into cash.

How can the dollar be a "safe haven" when the epicentre of the financial crisis lies in the United States? I can't make sense of that anomaly. I mean, c'mon, the Fed is printing like a drunk and the government has committed something like $12 trillion dollars to this mess. Then we've got Social Security, Medicare and other unfunded entitlement programs – you know the rest. How on Earth can a sensible investor scramble to buy dollars?

I also don't buy the euro or other currencies as a "safe haven" because they're also plagued by similar problems – some worse than others. There isn't a single currency out there that's better than gold. Not one.

Basically, gold is the only asset outside of the credit system that remains no one else's liability. And that's why it's rallying in 2009 – its ninth consecutive calendar year gain.

Gold Stocks at Cusp of Next Bull Market Phase

Copenhagen, Denmark

Copenhagen is a beautiful city. I’ve been coming here since 1996 when I opened my first private baking relationship with The Bank of Copenhagen – later sold by its parent, Swedish furniture giant, Ikea.

In 2000, I established a relationship with Denmark’s second-largest bank, Jyske Bank. Jyske Bank Private Banking is a great operation offering all sorts of financial services and products, including currency programs like Invest-Loan. They also cater exclusively to Americans directly through their JGAM subsidiary.

From Denmark, investors can trade currencies, stocks, bonds and mutual funds. The bank is also dynamic creating structured products – many with a capital guarantee amid volatile and uncertain markets.

This morning, I sold some U.S. dollars for Danish krone and, as usual when traveling abroad, received a pittance for my dollars in exchange. No surprise on that score…

As you probably know by now from reading this daily muse, I’ve got zero confidence in paper money. Longer term, we’ll continue to lose our purchasing power vis-à-vis stronger currencies but especially against gold. The sad truth is that most people have no idea about this reality and continue to see their purchasing power eroded by inflation and devaluation.

I’ve been a gold bull for years and recently turned even more bullish on the gold stocks. I think we’re at the cusp of the next phase in this rally. Gold stocks have surged more than 120% since hitting a multi-year low on the XAU Index on October 27 at 65.72. We’re long overdue for the next push to $1,000 and beyond – and this time gold will stay in the four-digit zone.

The XAU Gold & Silver Index has two periods of seasonal strength starting from July 27 to September 25 and again from mid-November to early February.

Since July 27 the XAU Gold Index has declined 2.8%. Yet the trade has been profitable in 16 of the past 24 periods and has outperformed the S&P 500 Index by an average of 8.4% over this period.

But even more compelling is the seasonal advance that occurs starting in November.

From mid-November to the first week of February gold stocks have showed profitability in eight of the past ten periods for an average gain of 13.9%.

But even more impressive is our special X5 ratio, created by The Sovereign Society research team.

Any time the X5 ratio trades at 5 or higher, gold stocks have thereafter earned big triple-digit gains. And the index sits at 6.55 right now.

Finally, the U.S. dollar is an important part of this equation since gold usually, but not always, provides an inverse relationship to the world’s reserve currency. Gold prices and the dollar both gained in 2005.

The dollar might be oversold near term and might even muster a rally but, as we progress into fall and into 2010, the United States will grow desperate to grow inflation; rising prices are in short supply in 2009 amid deflation in household assets since late 2007, wage growth and real estate. A weak dollar would stimulate inflation. I believe the authorities quietly welcome a weak currency.

On the interest rate front, the Fed won’t be raising interest rates until 2011 at the earliest. The country is in such a mess right now that any pre-emptive strike against inflation would be utterly idiotic. Interest rates will stay low for a long time. There’s a reason why rates are at or near zero percent; there’s barely any demand for credit.

Gold stocks will probably trounce most risk-based assets over the next 12 months as gold finally blasts through the $1,000 an ounce barrier and stays there. It’s time to buy gold stocks.

Gold is King

Montreal, Canada.

With Eric in transit today, I will take the opportunity to write about one of my favourite topics in his place: gold. It's no secret that he and I consider ourselves very much as gold bugs. And why not? In a world where fiat currencies are supported by countries burdened by incredible debt, it only seems natural to want to own a "real" currency.

It always astonishes me when I check the number of the U.S. national debt. The current total is now $11,601,859,998,598.50 and is increasing at an average rate of roughly $3,900,000,000.00 per day! The number is so astronomically large that it is hard to get one's head around. To get it down to a more fathomable number, the amount of debt per U.S. citizen would be $37,839.65. The scariest part is that under the current monetary system, the sky is the limit with regards to how much the government can raise that debt number. And so it does, issuing debt that will, inevitably, put incredible inflationary pressures on its currency.

Facing the possibility that inflation could lead to hyperinflation which can easily destroy a country's economy, governments of the world could be easily looking at debt default as viable alternative. With this in mind, I would much rather be holding gold than currency or bonds backed only by government "best efforts".

The fundamental reasons for owning gold as a permanent part of one's portfolio are clear. Eric has always suggested a minimum 10% one's portfolio be allocated to owning gold. But we also like to trade gold on occasion, be it physical gold or gold stocks. In performing a simple technical analysis on gold's price movement this year, now might be one of those times.

Since the end of January, prices have managed to stay firmly above the 200 day moving average even after coming down to test the moving average line on several occasions in early spring . What's more, 2009 has brought about a symmetrical triangle consolidation pattern on the gold charts. We should be watching carefully to see if prices break out above the trend line, at approximately $980. A breach to the upside could see an easy $100 dollar increase in the price of gold and, therefore, a worthwhile trade.

- Dugald Malcolm

New Canadian Gold Fund Offers a Twist

Montreal, Canada.

A new and unique closed-end gold fund hit the Canadian market last Friday with more than $366 million (C$400 million) raised from institutions and investors. Although introduced as a closed-end fund, if in six months the fund trades below its NAV, it will automatically convert into an ETF. The much anticipated offering also offers more unique twists compared to other globally-traded gold fund for two important reasons.

The Claymore Gold Bullion Trust (Toronto-CGL.UN) is the first Canadian dollar denominated gold fund to hedge its U.S. dollar exposure back into Canadian dollars. That’s a major shift away from other gold ETFs and closed-end funds in Canada, which don’t hedge out the U.S. dollars’ exposure. Since gold prices are quoted in U.S. dollars, investors in Canada have assumed adverse currency consequences since 2003 when the loonie began its ascent north of 1.60 versus the American dollar. The loonie opens this morning at 1.09.

Basically, Canadian investors (and foreigners) wary of holding U.S. dollar denominated gold funds can now maintain their constant purchasing power in local currency while participating in the gold bull market.

Over the last four weeks, for example, the loonie has surged 8% vis-à-vis the American dollar while gold prices have gained about 10%. A hedged gold bullion portfolio in Canadian dollars would have captured most of that total return; but in the absence of this hedge Canadian investors have barely benefited from gold’s recent upturn. The same goes for EUR, Norwegian kroner, Brazilian real and a host of other foreign currencies – all robbed by gold’s decline in dollar terms.

The second unique feature about Claymore’s new gold fund is the tax treatment of capital gains.

U.S. institutions were heavily involved in Friday’s offering because the deal offered a tax arbitrage strategy for gold bulls. Investing in the Claymore structure attracted a lower rate of tax than if the same investor made a similar investment in a U.S. product. If a U.S. investor holds physical gold in an ETF the capital gains attract a luxury tax at 28%; but holding the same investment in an offshore corporation or a trust – the structure that applies for U.S. institutions buying the Claymore Gold Bullion Fund -- attracts a lower 15% tax rate.

For U.S. investors the Claymore Gold Bullion Fund serves as an ideal investment tool to hedge against the long-term decline of the U.S. dollar. And unlike a regular gold ETF based in American dollars this one offers the chance to profit from currency appreciation and rising gold prices.

As for timing, now is not the ideal moment to place this trade. Commodity currencies have skyrocketed since last month and gold along with other commodities have surged as the American dollar has tanked.

Commodities and most foreign currencies are severely overbought. The Canadian dollar, which raced above par value against the U.S. dollar earlier in 2008, posted its biggest monthly gain in more than 16 years in May. Don’t chase prices. A correction lies ahead this summer.

China and the Future of Gold Purchases

With the International Monetary Fund, or IMF, poised to sell some of its gold this year, gold bug investors are on edge. That imminent sale will probably put some pressure on gold this summer but don’t let it depress you; the big picture remains unchanged as it pertains to the next dollar crisis, skyrocketing U.S. debt levels and the drive to create inflation by deflation-battered and wounded central banks.

In addition to the above reasons, I’m a gold bug because of the obvious accelerated decay of the global exchange rate mechanism. And it’s not just a volatile dollar that’s the primary actor destabilizing the financial system; many other currencies fluctuate violently from one year to the next causing disruptions in business activity, financial projections and cash-flow.

Currencies shouldn’t devalue or revalue by 20% or more in a short period of time. But that’s been the case since the demise of the Bretton-Woods gold standard in the early 1970s. Crashing currencies don’t evoke confidence among investors or businesses and ultimately lead to higher inflation and a lower standard of living.

About three weeks ago, China began to publicly express its concerns over exploding U.S. Treasury debt issuance. The Chinese hold about 40% of all outstanding American Treasury debt and, since 2001, have seen their dollar holdings decline vis-à-vis other currencies despite gains in T-bonds over the last decade. Basically, the Chinese appear to be growing frustrated with this quid pro quo arrangement whereby the United States consumes a fifth of her exports while Beijing supports the Treasury market by recycling part of its trade surplus into dollar-denominated Treasury debt.

According to the World Gold Council, China holds 600 tons of gold, or 0.9% of its foreign exchange reserves in physical gold. This compares to more than 8,000 tons for the United States and over 3,000 tons for the International Monetary Fund.

I find it truly hard to believe that with China sitting on almost 40% of all U.S. Treasury issuance and almost $2 trillion dollars of Uncle Sam’s paper in her foreign exchange reserve coffers that she’s not aggressively buying more gold. I’ve got to believe some of these numbers are not accurate; is China really reporting its true gold holdings to the World Gold Council? If the Chinese are so shrewd and pragmatic why haven’t they amassed more gold over the last several years?

I think it’s fair to assume that many government statistics worldwide are not accurately reported.

We already know that governments fabricate the consumer price index (CPI) because this component of price measurement really doesn’t depict the real rate of inflation occurring. I think it’s the same with China. We can’t trust government data in China any more than we can rely on government data elsewhere. If you subscribe to this view – and I certainly do – then I would find it hard to believe the Chinese have been sitting back watching their dollar reserves shrink vis-à-vis gold and other currencies since 2002.

I reckon the Chinese are aggressively accumulating gold as they gasp for air watching the United States print money like crazy to finance fiscal spending, bank bailouts and two military conflicts overseas. This rate of spending is simply not sustainable, even for a reserve currency.

Gold prices, which currently trade 13.5% off their all-time high of $1,033 an ounce, will recover swiftly before the end of the year and should close north of $1,150 before Christmas.

Though jewelry (fabrication) demand has indeed collapsed since $750 an ounce, especially in India, investors elsewhere are accumulating gold to hedge their paper money portfolios at a time when global government spending is totally out of control. Central banks will not be able to drain all of this incredible liquidity from the financial system once the markets stabilize; history does not bode well for fiat paper and this round will probably witness the worst destruction to our purchasing power since the early 1970s and possibly Weimar Germany in the 1920s.

Volatility Crashes but for How Long?

The big action in global markets since early March remains largely confined to trends in equities. As fears of an extended global market meltdown have receded since March, the VIX, or CBOE Volatility Index, or fear gauge, has collapsed a cumulative 28% since March 2.

Outside of stocks, barely anything is really moving at all, including government bonds, most corporate bonds, commodities and even currencies.

The lack of volatility in currency markets has been especially mysterious considering the relationship between the dollar and risk adversity since the onset of the credit crisis almost 20 months ago. As markets bled, investors dumped risky assets and piled into the dollar amid a wholesale liquidation of risk; the dollar has been rising only because institutions have been flooded with investor redemptions, which generated aggressive dollar accumulation.

The worst performing major currency, however, belongs to the Japanese yen, down over 14% since hitting an 11-year high earlier in March. The Japanese economy certainly doesn’t deserve a strong currency considering a whole range of economic data has literally crashed since January.

If risk is re-entering global markets then the U.S. dollar should be next on the firing line as investors move out of low-yielding Treasury bonds and sell dollars in the process. This should benefit hard assets, including oil and gold as investors once again seek to hedge their dollar assets from fears of rising inflation over the next 36 months.

Yet the U.S. Dollar Index (see below) is still hanging in there and remains above its important 200-day moving average but below its 50-day moving average. If the U.S. Dollar Index breaks below 81.70 then it’s quite probable the dollar will have peaked in the post-2007 credit crash.



Other assets, including crude oil – the largest single constituent in commodities indices – has also been confined to a trading range over the last few weeks. Crude oil has been unable to decisively break above $55 a barrel on this rally following a low of $33.87 earlier this year.

One of the most interesting market anomalies exist in the government bond market. Volatility has been markedly low even though investors have been selling Treasury bonds to buy stocks.

The United States, along with several other countries, is now heavily engaged in quantitative easing, which is basically a fancy term that equates to long-term inflation creation through debt monetization. Even though the Fed has been aggressively buying back Treasury debt over the last few weeks, yields on the entire range of Treasury debt has actually climbed, not declined.

If the Fed was not buying back Treasury debt over the last few weeks it’s highly probable that the entire Treasury yield curve would have steepened much further; hopes for an economic recovery – confirmed by the ongoing equity market rally since March 9 – should be accompanied by rising, not declining Treasury yields and therefore much higher volatility.

Volatility is now approaching an attractive level for speculators. The VIX can now be traded as an exchange-traded-note, or ETN, in the United States (symbols VXX and VXZ) while providing an easy route for investors to hedge their portfolio risk from the next correction. From its all-time high of 80.86 last fall, the VIX is now down 53%.

With the economy likely to be mired in a sluggish state over the next few years amid a deep credit deflation, investors would be wise to build some portfolio protection following a 30% gain for stocks since March.