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Wilkinson's Edge: The Edge on a Sledge

Saturday, 24 December 2005 12:00 AM



Dear MoneyNews Reader,

Here in Florida I'm rather skeptical about the white weather in the northeast. Is it really snowing? That notion seems a lifetime away in comparison to the relative warmth here in South Florida.

Late on Tuesday evening, after Mrs. Edge had returned from yet another effort to single-handedly save Florida's malls, we sat at the kitchen table eating KFC takeout washed down with a bottle of Californian Merlot.

We both had something to say about our thoughts on Christmas presents for one another. Normally we don't bother, instead concentrating on making sure the children are catered to.

For my part I wanted to make sure I wasn't going to waste money on what I had planned for her.

Mrs. Edge had already taken the plunge and bought me the item, but she couldn't suppress her enthusiasm about the present she had bought for me. Besides, apparently there was something I had to "activate" before I could use it.

I was certainly curious about what she had chosen. I'm such a spendthrift that I didn't want to get her something she wouldn't use.

By now I was starting to wonder if perhaps we'd had the same great idea for each other – but neither of us wanted to spoil the surprise.

You see, both of us love listening to the radio and in particular we love to keep up with what's happening back in Britain. To do that, we usually tune in to the BBC via the Internet on our home computer.

Recently, I'd been researching satellite radio and it's benefits. There are two main satellite channels that you might already have heard about. One is Sirius Satellite Radio and the other is XM Satellite Radio.

Indeed my recently launched Triple Edge Alert options service identified shares in XM as an ideal candidate – a stock with the potential for a pop to the upside.

Now, Mrs. Edge loves her radio and she regularly annoys the hell out of me in the middle of the night when it wakes me from my slumber.

So I, too, thought that satellite radio might be an ideal present for her this year. You can pick up a receiver for less than $100 and a subscription runs about $12 a month.

For that you get to choose from literally hundreds of advertisement-free radio channels covering sports, politics, rock and roll and much more.

You name it and they have it.

After Christmas, I'll be able to carry my receiver from the living room to the car and plug in to whatever I like on my way into work.

Best of all, they offer our beloved no-nonsense BBC World Service, which provides first-class news and analysis.

Now that Mrs. Edge has beaten me to it, I'm left floundering to find her a present.

Why does she always seem to have an edge on me?

As 2005 began, U.S. interest rates – as measured by the Fed Funds rate – sat at 2.25%.

At the same time interest-rate traders expected that by the end of the first quarter of 2006, rates would have risen to 3.67%.

At the latest FOMC powwow, the Fed moved that rate to 4.25% -- more than a half-percent higher than traders' myopic expectations this time a year ago.

As I write this weekend, the market now expects interest rates to stand at 4.75% by next March. That's a pretty big turn in sentiment during the year.

It's a whole percentage point!

The reason I start this section with that observation is actually quite logical.

There are many reasons that investors buy and hold specific currencies, but one of the largest drivers of currency attraction is its effective yield.

In other words, what is the price of a currency? Hopefully that explains my segue by way of interest rates.

A holder of dollars is paid for the privilege. The deterioration in sentiment toward inflation (and therefore interest rates) this year has played a large part in investors' collective decision to buy and hoard dollars.

In the pure world of foreign exchange the decision to buy one and sell another currency is impacted by relative yields. Interest rates on the dollar have been rising faster than rates anywhere else.

British rates actually fell in August, while the Europeans raised rates by a tiny quarter of a percentage point earlier this month.

The Japanese economy is just showing signs of emerging from a deflationary tailspin. A Bank of Japan official recently observed that rates will inevitably rise, but the perception is that this will occur later rather than sooner.

So it's hardly any surprise that the dollar has performed as it has in 2005.

But that performance masks apparent sentiment toward the U.S. currency. It took a long time for Wall Street to warm to the greenback this year.

The usual story goes something like this: The U.S. economy is faced with trade and budget deficits so large that they are inevitably set to topple the economy – and, therefore, the dollar.

America cannot live with an endless overdraft.

So as 2004 came to a close, it seemed that everyone on the planet was seemingly shorting the dollar up the wazzoo in the expectation that the fundamental twin deficit story would continue to decimate the currency.

But no sooner did 2005 begin than the dollar started its rally against pretty much everything – with the exception of Australian and Canadian commodity currencies. 

As you can see from the chart, the dollar's rally since its 2004 low this time a year ago has been spectacular and unrelenting.

The 12% gain in the value of the dollar against a basket of currencies of major trading partners has hurt many speculators.

Longtime dollar bear and investment guru Warren Buffett has been decrying the dollar since 2002 and has amassed gains in excess of $2 billion by so doing.

However, after suffering massive losses, in the third quarter of this year he trimmed the size of that wager against the dollar from $21 billion to $16 billion.

So what should we expect for 2006?

My own personal prediction is that the dollar's rally has pretty much run its course.

I expect to see the tables turned on the rationale for dollar bullishness.

I expect interest rates to top out here in the United States while other global central banks continue to raise their own, even if it is only incrementally.

While that narrows the yield gap between major currencies and the dollar, in an ever-so-subtle way it takes away a prop that has supported the dollar this year.

I'd expect the range for the euro versus the dollar to settle back to $1.20-1.30, while the Japanese yen should ease back into the 100-110 range in 2006. I'd expect the British pound to trade between $1.65 and 1.75.

Did you happen to see the action in the gold market during the last 10 days?

My word! If, like me, you enjoy the raw action of trading, it was a fun move.

Gold reached a 2005 high of $541 per ounce on Dec. 12 - only to immediately take out plenty of late-to-the-party buyers when it slumped right back to $489.90.

That's a pretty big move by any stretch.

But at less than $500 per ounce, apparently jewelers see the metal as cheap and wound up forcing the price back up through $500 on Thursday.

In Saudi Arabia and the United Arab Emirates, consumption rose by 16% in the third quarter.

At the same time demand for the precious metal rose by 8% in China, Taiwan and Hong Kong, according to research by the National Australia Bank.

Based on the surge in energy costs and subsequent inflationary pressures, the bank now anticipates that the 2006 average price of gold will be $532 per ounce. That compares to the 2005 average price of $443.81.

I still believe that gold is set to hit at least $550 per ounce before this rally is done. But I don't think it will necessarily stop there.

A 2006 setback for the dollar could simply feed the gold frenzy.

Have a great holiday! 

Andrew Wilkinson


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Dear MoneyNews Reader, Here in Florida I'm rather skeptical about the white weather in the northeast. Is it really snowing? That notion seems a lifetime away in comparison to the relative warmth here in South Florida. Late on Tuesday evening, after Mrs. Edge had returned...
Saturday, 24 December 2005 12:00 AM
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