The weekend meeting of the IMF resulted in little more than lip service being paid to the necessity of avoiding a global-scale ‘currency war’ despite the topic having obviously dominated the gathering’s agenda. A pledge to cooperate more on the currency front was however offered as the awareness that currency interventions are but one step away from trade restrictions (and worse) was also on display in Washington. As things now stand, the working out of a possible solution to the growing impasse has been left to another agenda; that of the G-20 meeting coming up next month.
The IMF meeting did yield a communiqué that concluded that the global economic recovery is “proceeding, but remains fragile and uneven.” The document also affirmed that “the rejection of protectionism in all its forms must remain a key element of our coordinated response to the crisis.’
Finally, on the topic of currencies, the joint release had this to say: ‘We call on the Fund to deepen its work in these areas, including in-depth studies to help increase the effectiveness of policies to manage capital flows.” Certain currency short-sellers were delighted with such wording; largely interpreted as a reprieve at least until November.
Thus, the U.S. dollar traded at an eight-month low vis a vis the euro and at a fifteen-year low against the yen during the overnight hours. Gold prices advanced to $1,355.00 during said hours as anticipation of Fed easing did not ease up whatsoever. In fact, hedge funds and large specs are more bearish on the greenback than at any time in history. Parlay those bets into other niches and you get Friday’s virtually 100% bullishness level in gold and silver. No room for any error among these players, to say the least.
The ‘error’ may come in the form of disappointment that the Fed might not be willing to throw another $1 trillion at the unemployment problem that refuses to go away as the U.S. economy undergoes recovery. Several economists have opined that Fed purchases may not do much at all to help bring about a significant bounce in the joblessness figures, and that an up to $2 trillion-sized asset purchase program would only yield perhaps a 0.4% gain in U.S. GDP – if that.
Half a trillion of bond shopping sorties might only boost U.S/ GDP by 0.1% while still leaving the unemployment rate above the 9% level for a couple of years yet to come. Will the exercise be worth it? Some say it will not be (some, who work within the Fed, that is). We have heard from them all, recently. The Fed’s long-range targets for joblessness percentages are above 6% and such levels may be achieved without the cosmetic ‘enhancements’ of a shot or two of monetary ‘silicone.’
If in fact the Fed adopts a small-steps-at-a-time approach and starts an IV drip of bond purchases while gauging their effectiveness on the economic equation, the trade may throw a tantrum the likes of which will certainly displease the majority of trend-following latecomers to the commodities party. Aside from that, the recent – and largest in eight years – decline in the U.S. dollar’s value has raised the odds of a rally of sizeable proportions by quite a bit at this juncture.
Oversold dollar conditions based on ‘selling the rumor’ (the Fed’s November ‘gimme’) are as obvious as Pamela Anderson in an art museum. The ‘shock & awe’ campaign on the easing front that the greenback’s short-sellers expect the Fed to undertake in three weeks may indeed turn to “s&a” – among them, should the Fed not live up to their dreams. We are at a place now where dollar bulls have capitulated and/or handed in their surrender notices which are under review.
BNP’s London-based head of currency research pointed to the (short-dollar) boat in which ‘everyone is sitting’ as ‘no longer safe.’ Never mind the fact the former Fed Chief Greenspan said the U.S. would have to do ‘very considerable damage’ to the greenback in order to render it unappealing as an investment. China, evidently, agrees. Its reserves might soon reach $2.5 trillion and the single most obvious holding within said reserves remains... the (you-know-what-back).
Here, on the other hand, is one boat that is a relatively ‘safe’ as a bet for today, at least: the gravy one.
Pass it over, please!
A Happy Thanksgiving Holiday to all of our Canadian audience!
Also, a Happy Columbus Day, America! See you in Little Italy!
Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America