Here’s what we said about the immediate future last Friday, in our weekly update to Australian Wealth Gameplan readers:
At the risk of making a foolish prediction I will do so anyway: the [U.S.} dollar will remain oversold as the Aussie reaches parity and gold goes over $1,400. But doubts about the Fed’s ability to do anything about America’s economy and the mushrooming mortgage foreclosure scandal are nipping at this market’s heels. Having broken those key psychological barriers, the big reversal/correction will come.

Mind you it’s incredibly strange that screaming red indicators of serious weakness in America’s financial system should be, of all things, [U.S.] dollar bullish. But the important point to remember is that the “risk trade” that has powered Aussie shares and commodities higher will be off the boil on renewed worries about the health of the U.S. financial system. The world will suddenly appear a lot riskier to traders and that should lead them pull in their head a bit on commodity prices (which are already looking toppy).

This doesn’t mean I’m a long-term dollar bull (far from it). But look for a reversal soon, probably next week. And then, the next phase…the actual quantitative easing from the Fed and the escalation of the mortgage foreclosure crisis.

This latter event threatens to blow an iceberg sized-hole in the hull of the American financial system, requiring another Federal bailout of trillions of dollars that America doesn’t have. This will be the death blow not just for the dollar standard but for the Bretton Woods two system of floating exchange rates. Gold will move up against all paper in that world. And it’s coming sooner than you might think.
–Based on that prediction, we’re still in the first phase of effects, where the “risk trade” reverses and stock and commodity prices fall, along with the Aussie dollar. Our guess is that faster and further the market falls, the easier it is for the Fed to make the case for Quantitative Easing. There will be a lot less resistance after another mini-crisis/market fall. It’s a clever tactic.

–You can allay the fear that Quantitative Easing II is hyperinflationary by engineering a crisis in which investors lose a few hundred billion dollars in a matter of days. A 10% correction in stocks and commodities puts the market at a lower base from which QE II can begin. It also neutralises the price signals commodities are otherwise screaming to prudent investors (inflation dead ahead!).

–But maybe we are being a bit too conspiratorial about everything. The banking cartel that runs America’s money would never manipulate the market like that, would it?

–Embedded in our analysis is that the recent strength of the Aussie dollar is only relative. That is, the local currency has become the plaything of the moment for U.S. dollar bears seeking yield. When the dollar bears take profits, the short-term gains in the Aussie will reverse too, even if the RBA raises rates on Melbourne Cup Day. This is probably bullish for the Australian price of a certain yellow metal that lives at number 79 on the periodic table of elements.

–But don’t forget number 47 either! That’s silver. According to another Bloomberg story, “Silver exports from China, the world’s largest, may drop about 40 percent this year as domestic demand from industry and investors climbs, according to Beijing Antaike Information Development Co.”

–“Customs data show exports plunged almost 60 percent to 970 tons in the first eight months. Cancellation of an export rebate in 2008 is also hurting shipments…Reduced exports may bolster prices that are trading near a 30-year high on speculation that governments worldwide will take further steps to stimulate their economies, weakening currencies and increasing demand for assets that are a store of value. China, the third-largest producer after Peru and Mexico, revoked export rebates in August 2008 to curb use of natural resources.”

–China taketh away credit…and silver and rare earth exports. That’s a whole lot of hoarding going on. Of course, China can’t “put back” nasty American Treasury debt to the U.S. Treasury the way investors can “put back” mortgage debt to banks. It appears to be doing the next best thing, buying and accumulating real metals of real value.

Courtesy Daily Reckoning Australia

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