Dollar Weakness Good for Gold Bugs
By Stuart Kaufman

It’s been an exciting and volatile couple of weeks. Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson are now in front of Congress for three days of testimony, and I expect the $700 proposed bailout of the financial system will be approved rather quickly. However, the financial and commodity markets are likely to be volatile for some time, leading up to the November election. How the election turns out will determine the next course of action, but in the meantime, I see U.S. dollar weakness amid an uncertain economic outlook, and gold strengthening as a safe-haven. Right now, I think there’s a good window of opportunity for traders in the commodities markets generally.

U.S. Dollar
On Monday, September 22, the U.S. dollar weakened the most against the euro since its 1999 debut on concern that the U.S. proposal to buy $700 billion in troubled financial assets will inflate the U.S. budget deficit. The greenback dropped for a fourth straight session, its longest declining stretch since June, touching $1.4821 per euro. The dollar also fell against the yen. Paulson’s plan to bail out banks from the credit crunch failed to restore investor confidence, sending the dollar as well as stock indexes lower Monday, while crude oil futures surged more than $16 a barrel to above $120, posting the biggest one-day gain ever.

Paulson and Bernanke began plotting their rescue plan last week as the long-running U.S. mortgage crisis began to intensify. The bankruptcy filing of Lehman Bros, a government takeover of insurance giant AIG, and a forced buyout of Merrill Lynch by Bank of America all happened in a manner of days, forcing quick action. The bailout plan, sent to Congress September 20, would mark an unprecedented government intervention in the markets, and would increase our debt ceiling by 6.6 percent to over $11 trillion, according to estimates. Even money-market funds appeared at risk, with some $400 billion of proposed government guarantees on the table.

Market participants sent the dollar south on news of the bailout proposal as it is likely to take a toll on our economy, and reduce foreign investment. In a Bloomberg article, the dollar will get “crushed,” according to John Taylor, chairman of International Foreign Exchange Concepts Inc, the world’s largest currency hedge fund firm with some $15 billion under management.

Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp., was quoted in the press as saying that “even with a plan, the likelihood there will be a very severe slowdown in the U.S. and elsewhere has increased.”

I have to agree. Just a few weeks ago, the markets were pondering when the Fed would raise interest rates, and now, they are betting on rate cuts. CME Group’s Fed funds futures market is pricing in odds of 38 percent the Fed will lower its key short-term lending rate (known as the Fed funds rate) a quarter percentage point at the October policy meeting. We are dealing with a difficult economic environment even without the government’s bailout spending, as the data remains less than robust.

The Office of Federal Housing Enterprise Oversight reported this morning that U.S. home values declined 0.6 percent in July, and home values have dropped 5.3 percent from a year ago. Existing and new home sales data for August are on tap for Wednesday and Thursday, and are expected to post declines. Durable goods orders are also expected to show a drop for the month of August. The National Retail Federation said this year could mark the worst holiday shopping season for retailers in six years.

My recommendation at this time is to buy the December CME euro currency futures at $145.10 limit or better, and use a 150-point stop.

Gold

Investors have shifted assets into precious metals as a haven for market turmoil. December gold futures rose more than $44 an ounce on Monday, closing above $900. Gold surged more than $100 in just two sessions last week, and saw its best weekly finish since 1999, up 13 percent. Silver, meanwhile, hasn’t seen quite as much investor interest, up 7.8 percent on Monday but still down just under 10 percent on the year.

Volatility has been severe. In the past 10 sessions, the historical volatility on the S&P 500 index was 54.9 percent. The Dow Jones Industrial Average saw a 1,000-point swing last week, hitting 10,459.44 on September 18, then rallying to hit 11,483.05 intraday on September 12.

People are becoming reluctant to have their money dependent on counterparty risk, and investors are turning back to commodities. The CRB Continuous Commodity Index, which measures 17 commodities, has risen more than 7 percent since September 16.

My recommendation for traders at this time is to buy December gold futures at $865 limit, using a $25 protective stop. Given the environment we are in, the overall feeling of the markets seems to be that equities will struggle while inflation could potentially increase dramatically.

The bailout is intended to stop the slide in equities and stabilize the financial markets, but the end result is this crushing debt, which could obliterate the dollar and likely keep equities under pressure. This is all very bullish commodities, and gold in particular. Institutional money has been flying into commodities, where the return is perceived to be better than in financials. That has elevated commodities in the past few days, with gold leading the way. Please feel free to contact me with any questions you have, and to develop an individual trading strategy to suit your particular account size and risk tolerance.

Stuart Kaufman is a Senior Market Strategist with Lind Plus, Lind-Waldock’s broker-assisted division. He can be reached at 800-924-1060 or via email at skaufman@lind-waldock.com.

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

You can hear market commentary from Lind-Waldock market strategists through our weekly Lind Plus Markets on the Move webinars, as well as online seminars on other topics of interest to traders. These interactive, live webinars are free to attend. Go to www.lind-waldock.com/events to sign up. Lind-Waldock also offers other educational resources to help your learn more about futures trading, including free simulated trading. Visit www.lind-waldock.com.

Futures trading involves substantial risk of loss and is not suitable for all investors. © 2008 MF Global Ltd. All Rights Reserved. Futures Brokers, Commodity Brokers and Online Futures Trading. 141 West Jackson Boulevard, Suite 1400-A, Chicago, IL 60604.