Commodities Down, Dollar Up … and Why That Could Change Soon

It didn’t take long for Europe’s sovereign-debt crisis to reassert itself. Here we are in May, a short three months after the last bailout of Greece, and Europe is crumbling again.

Greece is on the ropes, and will most assuredly have to splinter away from the euro and take back its currency, the drachma. It’s the only way Greece can get out of its depression. Dump the euro, take back the drachma, devalue it, and inflate its way out of the mess and out of debt.

Portugal is reeling again, too. Spain is also going down the tubes. Depositors are making runs on the banks. Moody’s has downgraded virtually the entire Spanish banking system. Spain’s stock market is at 20-year lows.

It’s not much better in Italy, the most-indebted country in Europe. And France isn’t far behind. Now that the Socialists lead the country, you can expect France’s fiscal situation to worsen.

Meanwhile, the only economy holding Europe upright is also starting to slow. Germany’s giant export machine is wobbling, and so is its economy.

So it should be no surprise to you that stock markets are falling now. In order of weakness: Europe is the most-vulnerable, U.S. stocks are the second-weakest, and Asia’s equity markets are the least-weak of the three corners of the globe. Latin American markets will generally follow the U.S. markets.

But what about commodities? It’s certainly understandable that economic weakness would also take its toll on demand-sensitive commodities such as copper, foods, other base metals, and the like. After all, if economies are sinking anew, demand for these commodities is sure to fall.

And that’s precisely what I’ve predicted for the commodity sector. I was perhaps one of the only commodity bears out there for the past several months, but now my warnings are coming true. We’re seeing a sharp decline in most commodity prices.

The big question on most investors’ minds is why gold and silver are also falling. After all, when governments are on the verge of collapsing, shouldn’t that be bullish for gold and silver?

Under certain circumstances, yes. But not always. If the peripheral economies are collapsing, and their governments are under social attack, like what’s happening in Europe, then it’s not all that bullish for gold and silver. The core of the global economy, the U.S. and the U.S. dollar, can still suck up much of the frightened capital.

Again, that’s precisely what I warned, and precisely what’s happening. As scared capital flees Europe — it’s going primarily into cash, and into the U.S. dollar.

That’s pushing the U.S. dollar up, and taking the shine off of precious metals. Plus, always keep in mind that at the beginning of a crisis like we have now in Europe, investors want cash above all else. So gold is not the king right now. Cash is king.

That’s all going to change soon, because the world’s central banks despise runs to cash … they despise falling asset prices … and they absolutely abhor disinflation or, even worse, outright deflation.

So that means that central banks are soon going to start printing massive amounts of money again, flooding the global economy with trillions of additional dollars.


And when they do, you could just as easily see gold and silver bottom out and begin the next legs up in their bull markets.

I believe that’s not too far away. But it’s likely we will see further declines first. My models tell me that we are not yet at asset price levels that would send central banks into panic mode, forcing them to put the pedal to the metal with their money printing.

Here’s what my models are telling me. Look for further declines ahead …


  • Down to below $1,440 in gold
  • Down to below $26 in silver, to as low as $21
  • Down to below $85 in oil
  • Down to below 12,000 in the Dow Industrials


And mark my words: When the commodity markets do bottom out and central banks start printing money again — it will represent the beginning of the biggest phase yet in the commodity bull markets.

So get ready, because it’s right around the corner.

Best wishes, as always …



Larry Edelson has nearly 33 years of investing experience with a focus in the precious metals and natural resources markets. His Real Wealth Report (a monthly publication) and Resource Windfall Trader (weekly) provide a continuing education on natural resource investments, with recommendations aiming for both profit and risk management.

For more information on Real Wealth Reportclick here.
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What Buffet’s Buying + US Dollar & Gold Long Term

Crude oil is falling… copper is falling… stocks are falling. Because of the European debt crisis, people are fleeing assets that are sensitive to economic growth… and flocking to “safe havens” like bonds and the U.S. dollar (cash). As you can see in the chart, the dollar is currently winning the world’s “least ugly” paper currency contest. It’s gained around 9% from its August lows. This doesn’t sound like much to most people, but it’s actually a huge gain for a major currency.

20120516 DIG_USD

Of course, as the dollar rises, gold falls. The yellow metal traded for $1,750 an ounce in February. It’s now trading for $1,530. That’s a decline of 12.5% in three months.

On the surface, gold is falling because people are dumping assets to raise cash. Gold is a liquid asset, just like stocks and crude oil. So it gets thrown overboard when people are desperate for liquidity. But the “big picture” reason gold is experiencing a decline is that it’s simply “due” for a substantial period of sideways (or lower) prices. Gold has risen in price every single year for the past 11 years. No other widely traded asset or index can match that record of consistent gains. Gold is up more than six-fold during this relentless, relatively calm bull market.

With this amazing, once-in-a-century bull market in mind, we remind you that markets are like runners. They can’t run flat-out for miles without a break. The long-term picture for gold hasn’t changed. Western governments still have massive, unfunded debts and obligations that cannot be paid with sound, honest money. The people of Asia (especially China and India) are getting a little richer every year. These people have a centuries-old affinity for precious metals, like gold and silver… and they are still buying. Again, gold is simply due for a break.

To put its recent decline into perspective, let’s look at the “long view.” Below is a 12-year chart of gold. As you can see, gold could fall all the way down to $1,300 an ounce and remain in a bull market. That’s where it was in late 2010. In the context of gold’s massive bull market, even the latest decline isn’t severe…

20120516 DIG_GOLD

Another bit of perspective: Rich, sophisticated investors don’t view gold as a conventional investment. It’s not like owning an income-producing rental property. It’s not like owning shares in a dividend-paying, blue-chip company like Coca-Cola. Gold is real money. It’s a form of “crisis insurance.” Rich people buy gold and hope they never have to use it. They don’t buy it with the hope that they’ll make hundreds of percent on their holdings. You can read more about the “rich guy” way to view gold in this short interview.

Speaking of rich people and what they buy…

This morning, the news services are reporting on the latest moves by billionaire investor Warren Buffett. His company, Berkshire Hathaway, has just filed reports with the Securities and Exchange Commission showing it has new stakes in automaker General Motors and media company Viacom. Buffett also increased his stake in global discount retailer Wal-Mart – one of Dan Ferris’ favorite World Dominating Dividend Growers. Buffett recently said he doesn’t think the Mexico bribery scandal will harm the company’s long-term earnings power. Dan agrees. He sees the recent selloff as a good buying opportunity.

 Following the investments of legends like Buffett is a great way to find potential low-risk, high-reward ideas. The world’s best investors and traders have massive research budgets. They have the best contacts. They have the best computers and the most extensive databases. They’re able to achieve a tremendous “information edge” in the market. That’s why looking over their shoulders makes sense.

Over the past few days, we’ve told you a few details about our newest service, DailyWealth Trader. We have several goals with DailyWealth Trader. The main goal is to educate readers on the best ways to make low-risk, high-reward trades. The service also acts as a “digest” of ideas from the world’s best investors and traders.

For example, in the May 1 issue (which was made available only to Alliance memebers), we discussed one of the top ideas from legendary trader Jim Chanos. As one of the world’s best short sellers, Chanos makes money by betting on a company’s stock price falling. We highlighted his short position in Brazilian oil producer Petrobras. Chanos says the company is the picture of how government mismanagement wrecks companies. It’s also spending hundreds of billions of dollars to develop high-cost offshore oilfields. Chanos is bearish…

As you can see from the chart below, shorting Petrobras was a heck of an idea. The stock has collapsed from $30 per share to less than $20 per share in just a few months. As of yesterday’s close, that trade is up 17.5% in just two weeks.

20120516 DIG_PBR-1

Again, with a subscription to DailyWealth Trader, you’ll receive ideas from the world’s best investors and traders. You’ll also receive a priceless education on how to act on those ideas. If you’re new to trading… or interested in furthering your market education, you’ll get tremendous insights from DailyWealth Trader… at a very low price. You can sign up for our upcoming educational video and receive information on a trading technique we normally charge at least $1,000 to teach here.

The Mistake You Are Dying To Make…

Back in mid-March when we first talked about The Mistake You Are Dying To Make…specifically the temptation to buy gold shares because they were “cheap” relative to where they had been and “cheap” relative to gold…which somehow meant that buying them was sort of “value investing” for the long term…my advice was, ” Don’t buy a falling market…as Gartman says, when a market is going down you have no idea how far down…down is.” Well the index of gold shares is down ~20% since then, and gold just closed at a new low for the year.

People will have opinions about what a market SHOULD be doing and they will act on those opinions. For instance, they may think that gold SHOULD be going up because the central banks are printing mountains of currency. They think that gold shares are a “steal” because they are “cheap” relative to gold, therefore it makes sense to buy into a market that is falling like a stone. I’ve been short gold since Feb 8 because it seemed to me that the market was going down, not up.

It reminds me of my description of a market strategist: he is a guy who forms an opinion about a market, gives you several reasons why he is right, and will stick with his opinion through hell and high water. When the market goes against him he digs in his heels instead of cutting the trade and says something like, “It’s taking longer than I thought for my view of the market to manifest, but I’m more convinced than ever that I’m right and the market is wrong.”

I look at a market and see where it has been and where it is now. I form opinions about where it might go next, and why…I call that anticipating. But instead of selling a market because I have a bearish opinion I wait for some confirmation that the market is doing what I think it SHOULD be doing before I put on a trade.

I realize that markets often behave differently than I think they SHOULD. That tells me that I didn’t (and couldn’t) know everything about that market when I formed an opinion about where it SHOULD go…something that I hadn’t thought of or wasn’t expecting came along and had a big influence on the price.

As a trader I have market opinions all the time….I’m always looking for an opportunity. But since I’ve seen so many of my opinions (and the opinions of others) turn out to be wrong I don’t want to “bet my life” on any of my market opinions. I’ll wait for a confirmation to put on a trade but if the trade isn’t working I’ll close it out rather than deny the fact that I’m wrong on the trade. I want to clear my mind…be open to seeing what is happening in the market…and find an opportunity to get into a trade that works…rather than wasting time and money on a trade that is not working.

I can’t imagine how much money has been lost by people buying into a falling market thinking that they were getting a bargain because it was cheaper than it used to be…only to watch it fall lower and lower…as they move more and more into denial over their losses. Maybe that’s human nature, but its not a successful trading strategy!

I continue to trade on the expectation that stocks and commodities are headed lower and the USD is headed higher.

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Unscrambling the Euro Eggs

On April 17 I wrote about a conversation with an individual who lives in Athens. He had this to say about the coming Greek elections:

    “The other parties are communists, radicals and crazies. If they have a hand in the new government, then on May 7 Greece will be forced to take dramatic steps. The whole idea that the country should suffer, so the bankers can get paid will have to change.”

He also said this:

  “The attitude in Brussels and Bonn towards Athens will change after the election as well!”

He had that right, so I called him back to get an post-election update.

BK: Is it true that you will soon spending Drachmas?

Athens: This seems to be the only possible outcome. Germany will no longer support Greece, neither will the IMF.

BK: What would the new Drachma be worth in Euros?

Athens: Far less than the rate that was used to convert Drachma to Euros in 2001. At least 50% less. For Greece, the exchange rate for the Euro will be the key, but you can’t forget that the Drachma will also have a new exchange rate for the dollar.
Greece joined the Euro in 2001 at a fixed conversion of 341Greek Drachmas to the Euro (EURGDR). In the period preceding the link, the USDGDR was 328.

Assume the Drachma floats freely and promptly loses half of its value versus the Euro. The market rate would be EURGDR 682. If the EURUSD was trading at 1.3000 it would mean that the USDGDR would be 568. The GDR would lose half its value against the Euro but it would only lose on 37% versus the dollar. I asked the fellow from Athens about this:

Athens: There is the proof. The Euro is too high against the dollar.

I thought that was an interesting comment. I went back and looked at the original conversion rates to the Euro for France, Italy and Spain and compared them to what the USD exchange rates would be today:



Is China a Currency Manipulator?

Mitt Romney thinks so:


    China has an interest in trade. China wants to, as they have 20 million people coming out of the farms and coming into the cities every year, they want to be able to put them to work. They want to have access to global markets. And so we have right now something they need very badly, which is access to our market and our friends around the world, have that same– power over China. To make sure that we let them understand that in order for them to continue to have free and open access to the thing they want so badly, our markets, they have to play by the rules.

    They’re a currency manipulator. And on that basis, we go before the W.T.O. and bring an action against them as a currency manipulator. And that allows us to apply tariffs where we believe they are stealing our intellectual property, hacking into our computers, or artificially lowering their prices and killing American jobs. We can’t just sit back and let China run all over us. People say, “Well, you’ll start a trade war.” There’s one going on right now, folks. They’re stealing our jobs. And we’re gonna stand up to China.”

The theory goes that by buying U.S. currency (so far they have accumulated around $3 trillion) and treasuries (around $1 trillion) on the open market, China keeps demand for the US dollar high.  They can afford to buy and hold so much US currency due to their huge trade surplus with America, and they buy US currency roughly equal to this surplus.  To keep this pile of dollars from increasing the Chinese money supply, China sterilises the dollar purchases by selling a proportionate amount of bonds to Chinese investors.  Supposedly by boosting the dollar, yuan-denominated Chinese goods look cheap to the American (and global) consumer.

First, I don’t really think we can conclusively say that the yuan is necessarily undervalued. That is like assuming that there is some natural rate of exchange beyond prices in the real world. For every dollar that China takes out of the open market, America could print one more — something which, lest we forget — Bernanke has been very busily doing; the American monetary base has tripled since 2008. Actions have consequences; if China’s currency peg was so unsustainable, the status quo would have collapsed long ago. Until it does, we cannot conclusively say to what extent the yuan is undervalued.


John Taylor of FX Concepts: Greece Will Leave Euro This Summer

John Taylor, the founder of the world’s largest currency hedge fund FX Concepts, spoke with Bloomberg TV’s Erik Schatzker and Sara Eisen and said that Greece will leave the euro this year. He went on to say that, “this summer I think is very likely…the Europeans aren’t going to give them money, the IMF’s not going to give them an OK. They will be out of money in June.”

Courtesy of Bloomberg Television

CLICK HERE to watch the video