US$ vs. Gold Prices: A Little Perspective, Obama 2010 Budget, $1.9 Trillion Increase in Debt Ceiling

Perspective: US$ vs. Gold

-US$ tops out on March 2nd, 2009 and declines by 18% at the low on December 1st.

-During the same time period (March 4th – Dec. 3rd) Gold prices rise 34.8%

-From Dec. 1st to Jan. 29th the US$ rallies 6.5% while Gold prices fall 12.28%

-The US$ rally has failed to break above the 200-day moving average and remains in a long-term downtrend.

-The Gold price advanced 30% from Sept. thru Dec. to reach a high of $1,225, has since retraced 50% of that move and has settled around $1,100. This is normal action in the context of an overall uptrend and it is action that would be considered healthy.

Question: What is the fundamental basis for a US$ rally or decline?

Answer: The continuation or cessation of Quantitative Easing/easy credit in all forms.

This is a simple answer to a complex question, you say? Respectfully, I say, “Wrong, the question is not complex.” Traditional financial news outlets would like you to believe the question is complex so you continue to waste time and money in your effort to understand.

For two months the US$ has rallied, not because the economy is recovering or company earnings are improving, but because the possibility of continued Q.E. was in question.  All of the participants involved  in the events I list below benefited from a stronger US$ and created all sorts of sound bytes during the last two months to champion their cause. The biggest beneficiary of this jawboning — and perhaps most important — was, of course, Ben Bernanke. The US$ had declined 18% and word began to spread that Ben may not be reappointed. So Ben and his cohorts began to talk about tightening policy in all of its forms. I stress the word, talk, as no actions have been taken to reduce liquidity.

List of the events:

The State of the Union address

Ben Bernanke’s Reappointment

The FOMC meeting (for months now the US$ has rallied in front of FOMC events)

The Geithner grilling on Capitol Hill

All of the above happened in the same week, the last in Jan., and one can argue all participants appreciated the US$ appreciation. Coincidence? We think not.

That was then, this is now…

Bearish US$ developments as of Feb. 1:

-2010 Budget released: After parsing the numbers the increase in spending looks real, the “savings” as usual appear dubious. Evidence the insanity below:

The Wall Street Journal reports President Obama will propose on Monday a $3.8 trln budget for fiscal 2011 that projects the deficit will shoot up to a record $1.6 trln this year, but would push the red ink down to about $700 bln, or 4% of the gross domestic product, by 2013, according to congressional aides. The deficit for the current fiscal year, which ends on Sept. 30, would eclipse last year’s $1.4 trln deficit, in part due to new spending on a proposed jobs package. The president also wants $25 bln for cash-strapped state governments, mainly to offset their funding of the Medicaid health program for the poor. To get the deficit down by the middle of the decade, Mr. Obama will be relying on some cuts that have previously been proposed without success, on cooperation from a wary Congress and on a yet-to-be set up debt commission to suggest politically difficult choices. reports the White House budget proposal released on Monday assumes the U.S. economy is heading for a six-year run of above-average economic growth with no sign of a worrisome spike in inflation or interest rates. The forecasts underlying President Barack Obama’s budget plan show real gross domestic product rising 2.7 percent this year, which is largely in line with private forecasts. Beginning in 2011, the White House’s projections diverge. It expects six consecutive years of strong growth ranging from 3.2 percent to 4.3 percent — well above what most economists consider the longer-term trend of around 2.6 percent. The last time the economy saw a similar streak of strong growth was in the late 1990s, during the dot-com boom. Obama has said both that expansion and the housing-powered growth in the mid-2000s were bubble-driven, and he wants the next expansion phase to rest on sturdier pillars. If the White House is assuming stronger economic growth, that implies bigger tax revenues and a smaller budget gap. The proposal shows the deficit shrinking to just under 4 percent of GDP by 2014, from an estimated 10.6 percent this year.

-Senate votes 60-39 to increase US debt ceiling by $1.9 trillion – DJ (This vote was delayed in Dec. adding to the US$ rally at that time)

-Personal Consumption and Income Weaken

-Construction Spending Dips in December

I will leave you with the following quote from White House Economic Advisor Romer, “ …strong GDP forecasts included in the budget are based on a history of growth after recessions.”

To recap, the “strong” GDP numbers carried in the budget are the primary source of deficit reduction going forward.  Does anyone else see the Lewis Carroll nature of  the 2010 budget, or am I just a madhatter? Romer says, “history of growth after recessions.” This assumption would imply we have just experienced a normal recession but we all know that to be untrue. We can all agree a credit crisis of epic proportions led to a real estate collapse that has defied all expectation. These events were not normal or historic, hence the growth of GDP going forward should not be normal either.  Previous “normal” recessions were preceded by sharply rising interest rates. “Normal” recoveries were preceded by sharply declining interest rates.  According to Romer’s logic the Fed will need to take interest rates substantially below zero to foster a “normal” recovery. Pay close attention to the appearance of President Obama during his next speech and see if he looks like a Cheshire Cat.

Is it any wonder the price of Gold jumped 4.2% in the two days following the budget release?

About Bret Rosenthal

Interpreting the news that moves markets. Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds
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