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Metals Market NEWS UPDATE



Hedge fund managers and newsletter writer Mike Swanson sees a big decline in the dollar and a return of the gold bull market just ahead. "I just took some short positions in the dollar today and am going to start to build a long position in gold and silver over the next few weeks. Gold and Silver tends to trade opposite to the dollar and the dollar is about to resume its long-term decline," he said.

Most investors may be totally asleep when it comes to the dangers of a falling dollar, but there appears to be a buzz of activity inside the Federal Reserve and the Treasury Department. Three weeks ago the Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke traveled to China to discuss the US trade deficit with China and probably tried to talk the Chinese government into lowering the value of the Yuan.

The Treasury Secretary is taking steps to prepare for a dollar crisis. According to the Wall Street Journal, Paulson "has reinvigorated the President's Working Group on Financial Markets, which had languished. Mr. Paulson is chairman of the Working Group, which coordinates government policy on financial markets and includes the heads of the Federal Reserve, Securities and Exchange Commission, and Commodity Futures Trading Commission. Mr. Paulson has insisted that they meet about every six weeks. Before his arrival, the group met every few months and sometimes as infrequently as once a quarter."

The Wall Street Journal went on to say, "Mr. Paulson is having the Working Group look at the systemic risk posed by hedge funds and derivatives, and the government's ability to respond to a financial crisis, officials said. He has ordered his chief of staff, Jim Wilkinson, to oversee the creation of a Treasury command center to track markets world-wide and serve as an operations base in a crisis. The center would revive a market-monitoring room closed in a 2003 budget cut."

As you probably know the Working Group on Financial Markets is the official title of what some people call the "plunge-protection team."

After the Wall Street Journal article came out, Fred Barnes, of the neo-conservative Weekly Standard magazine, wrote this: "Paulson believes a financial crisis is an overdue serious crisis that would be a body blow to the economy. This fear is shared to some extent by Bush and Bolten, who wanted a major Wall Street player at Treasury in case an economic emergency occurs."

According to Mike Swanson, "the accumulation of debt in the United States cannot continue much longer. In the last century the ratio of debt to GDP hovered between 120% and 160%. In 1929 the debt rose to 260%. Now the ratio of debt to GDP is at a mad 300% and has been growing over the past year. Something has to give."

Economist Mark Thornton, author of Tariffs, Blockades, and Inflation, agrees. He thinks investors need to pay attention to gold and silver. "There is always a bull market somewhere in the economy. It could be junk bonds, real estate, a particular currency, tech stocks, foreign markets, land, blue chips, or small caps, " he says, "Today we are in a bull market in gold, silver and commodities. Oil and gas are at all-time highs while metals such as silver are up more than 25% in 2004."

The dollar has taken a plunge during the past five weeks. The US dollar index broke below its 85 support level and has been falling ever since. Its next support area is 80, which has been support for the dollar index for thirty years. "It seems very likely that this level will be tested within the next few months. And if the dollar index stays below 80 for more than a few weeks a full blown dollar rout will be very likely.

The thing about currencies is when they get in a trend they tend to stay in that trend. The fundamentals behind currencies include economic growth rates, interest rates, and debt levels. The dollar topped out in 2000 and 2001 as the bubble in the NASDAQ burst and the US economy entered into a recession. It then fell until the Fed began to raise interest rates in 2005.

That cycle of interest rate hikes helped to put a bid underneath the dollar. That cycle came to an end this summer and it now appears that the Fed will actually start to lower interest rates next year. Fed funds futures contracts are now predicting a 60% chance of a rate cut in March as recent economic data points to signs of a slowing economy. A slowing economy and falling interest rates will bring with them a resumption of the dollar bear market.

"I would expect an orderly drop in the dollar index down to the 80 level to occur in the first quarter of 2007. After that though, if the dollar stays below 80 for several weeks, a full blown dollar crisis will likely begin. Gold, Silver of course, will move up ahead of that. I expect gold to go through the 700 level as the US dollar index tests 80. A move below 80 in the dollar index however, will bring the price of gold above $1,000 an ounce," says Swanson.

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