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Tags: gold | oil | economy | dollar

Dollar Strength Halts Wall Street, Economy

By    |   Wednesday, 14 January 2015 07:52 AM

I was chatting with my daughter, a senior in high school last night. She is taking a course in economics and often wants to talk about economic theories and the real world with me. It is amazing what a poor job the textbooks do in explaining economic theory or how they do not talk about the real world.

Her line of attack last night was how the strength of the U.S. dollar was great for the United States. She, in her misplaced loyalty to the country, determined that the stronger the U.S. dollar, the better it is for the citizens and the country. I could excuse her as a high school student still learning the basics, but when I see mainstream financial media spout headlines such as "One dollar Equals One Euro" or "The American Dream Is Alive as Economy Recovers," I shake my head at the ignorance of the so-called financial writers who do no diligence or research before they write their missives.

So the claim is that the U.S. economy is recovering, huh?

For December:
  • The ISM Manufacturing Index fell from 57.5 to 55.5.
  • ISM Non-Manufacturing (Service) Index fell from 59.3 to 56.2.
  • Construction Expenses fell by 0.3 percent.
  • Chicago Purchasing Managers' Index fell from 60.3 to 58.3.
  • Average wages for employees fell again (unemployment number).
I am not sure those are signs of a robust economy or a growing economy.

Meanwhile, Wall Street has begun to notice the chinks in the armor. While this is a new turn and I am skeptical about the stock traders actually noticing things, we have seen more days of decline since the start of the year than we have up days. For once the stocks are not constantly rising despite negative news of the economy all around. This time the data might appear positive, but the details behind the headlines are actually being seen and reacted to.

Another sign that the false narrative about the U.S. economy doing well is that the 10-year Treasury is trading below 1.90 percent.

Gold, an asset that has been abused severely in the last couple of years, is seeing renewed interest. It is sitting firmly above $1,200, and if the chartists are to be believed, it is breaking long-term trends and we'll see the price rise to $1,300 and then higher from there. Then there is the recent bullish action in the gold-mining sector — the Market Vectors Gold Miners exchange-traded fund (GDX) is up almost 17 percent so far in 2015.

Oil prices tell us a story that is both good and bad news. As a consumer, we love the fact that gas prices in many states are at or below $2 per gallon. Yet it is also nerve racking to think what the implications of low oil prices are. The lack of demand, the overproduction and the increase in supply that cannot be sold are indicative of weak economic growth for some time to come. To boot, we have Prince Al-Waleed of Saudi Arabia who brashly proclaims that we will never see $100 barrel of oil again. For the Saudis to believe that spells the end of their reign.

With the economic growth myth about to go bust, the fear of deflation will take root due to low oil prices, and as a result, the Federal Reserve will have no choice but to delay interest rate hikes. Believe it or not, that will actually bring relief in a true sense, as the dollar will sink and then we will see oil prices rise, inflation become somewhat real and the world go back to normal.

In the meantime, I would bet on gold rising to $1,350 to $1,400 an ounce in the near future, and SPDR Gold Shares ETF (GLD) is probably the easiest way to play that trade.

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I was chatting with my daughter, a senior in high school last night. She is taking a course in economics and often wants to talk about economic theories and the real world with me.
gold, oil, economy, dollar
Wednesday, 14 January 2015 07:52 AM
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