Wednesday, June 26, 2013

Is Pure Gold the best way to play a strengthening US dollar?

There are more and more signs that the trend for the US dollar in the foreseeable future will be upward: The Federal Reserve has convinced nearly everyone that Quantitative Easing is on the way out; bond markets are pricing in an economic recovery; Case-Shiller is reporting that Stateside house prices are growing more strongly than expected and US employment continues, for now, to improve (although we have yet to see consistent over-200k monthly Non-Farm payroll hiring figures).

So how to play the expected rise in the USD? As previously discussed, the US dollar index falls a little short as the vehicle of choice because its components often compete with each other to keep it from having the kind of movement traders would like. That leaves currency pairs that involve the greenback. But there is an unfortunate tendency here for these to behave according to their own agendas, from time to time. For example, the Euro seems to meet an impenetrable support in the range of 1.28 to 1.30 to the USD, and there has to be some suspicion that this is because, while monetary authorities in the Euro Zone know they have to reduce rates to provide stimulus, they are not happy with a weakening Single Currency and will take other measures to ensure this does not happen.

We have been short the Aussie dollar against the US unit, but then Ms. Gillard, the Australian Prime Minister, gets taken out by her party colleague, Mr. Rudd, and the markets like this development enough to put our trade into reverse and stop it out.

No, the best way to play the strengthening US dollar in our book is to look to the purity of gold. This is not a reference to the molecular characteristics of this metal, but rather to its economic cleanliness. Gold does not have a Central Bank, as such, with all of the attendant uncertainties that this entails; it does not have a political dimension and, as no interest is paid on gold bullion holdings, it is not subject to rate differentials. And apart from its role as a hedge against the decline of other assets, gold, as our economist friends would say, has negligible utility. Trace amounts are used in some electronic equipment and, of course, as jewelry,  but it does not have the fluctuations in demand that might be seen in other precious metals, which are used in industry, such as platinum. This commodity forms part of the manufacture of catalytic converters.

We like its price movements now that there is a tendency for those who saw it as the ultimate safe haven in the wake of the Great Financial Crisis to unlock, slowly but surely, their assets so that they can be put to work in other instruments.

In consequence of the above we are short gold against the US dollar.

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