Why Gold and Oil are Hot and the Dollar and Financials are Not
This is a quick explanation for all those who can’t quite get a grasp on what the hell is going on right now with some of the big factors influencing the stock market.
The Dollar
When the Feds cut rates a half a point in September the market loved it but the dollar did not. The dollar was already taking pressure and this only intensified it. Interest rates and the dollar for the most part correlate with their movements.
Now, following the half point cut came the most recent quarter point rate cut which only made the situation worse for the dollar because again dropping rates puts pressure on the dollar. The greenback was already hitting lows against the Euro and heck the Canadian Loonie was just as a valuable. Things haven’t gotten any better here in early November and may take some time to correct themselves.
In fact, the dollar is so weak that even supermodel Gisele Bundchen knows better to get her pay elsewhere. The world’s richest model is now insisting that her pay be made from the Euro instead of the dollar. Go figure.
Gold
Because of the dollar taking such a brutal beating investors run to nothing other than Gold. Gold and the US Dollar are used as hedges against one another. When one goes down the other goes up, and when the other is down the one goes up. You follow me?
I first mentioned Gold on this blog back in September and the best way to invest in Gold is with the Streettracks Gold Trust (GLD) which is an exchange traded fund that tracks the price of the gold bullion. Gold has only continued to take off in price as the dollar has fallen in price. In fact, Gold closed yesterday at $833.50 on the AMEX and is also considered to most likely be the next bubble, but that is a story for a different day.
Oil
Oil is a bit more interesting than the dollar and gold I think only because of the heavier influences of supply and demand. There are always worldwide factors that can temporarily cause oil to jump in price like the recent Mexico shutting down production of 600,000 barrels in late October and the whole dilemma with Iraq’s oil.
One of the big reasons oil has climbed though is because it is used as an alternative investment to the dollar. Dropping interest rates recently has only helped oil climb higher in price. This week oil crossed above $98 a barrel and in October was up over 18%.
The funny thing about oil is that most people thing there is a direct correlation between the price of oil and what you pay for gas at the pump. Gasoline is traded completely separate from oil and if there was a direct tie in prices then instead of $3.16 gas I paid this week I probably would have paid something like $3.50 for if not more. Now, oil increasing in price does influence the price of gas though. Oil has climbed far faster than gas prices but still gas prices as I am sure you have noticed have jumped from the high $2.80s to the $3.15+ in literally only two or three weeks.
Financials
Washington Mutual (WM) stock lost 17% in value yesterday alone. Stocks like Goldman Sachs (GS), Morgan Stanley (MS), Citigroup (C), and American Intl Group (AIG) are only going to continue to take a beating. The companies are writing down Billions of dollars due to the mortgage crisis. There are millions of home owners that are now in the process of defaulting on mortgages and it is quite the dilemma. Barry explains this better than I can and really the situation is only expected to get worse.
The Overall Market
With all the above said, you can probably begin to see how certain pieces play a more important role than others. The funny thing is though that ALL of these factors have been established and in play for extensive periods of time. So, really to see the market selling off NOW today and yesterday versus last month doesn’t make logical sense.
Perhaps the market has been more heavily influenced by Bernanke’s words, but again this isn’t new news. The positive is right now heavily outweighed by the negative overall investor sentiment and until that changes the bears will continue to be on top.
12 Responses
Other Websites Referencing This Post
- Carnival of Personal Finance #127 - Wonders of the World | Moolanomy
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The Fed is going to have their hands full trying to pull us out of this. I’ve been reading many people advocating raising of interest rates. No one wants a recession, but raising interest rates would help stabilize the dollar. It also would lower oil prices and thus combat inflation.
Unfortunately, a rate increase would ultimately cost some people their jobs. Glad I don’t have to make that descision.
Ooh, I’m interested in your thoughts on gold being the next bubble!
Good summation of the story up to now. I agree with Jonathan – the fed may soon be stuck between a rock and a hard place. I believe the term is “stagflation”.
Investors have been running to the Loonie as well as gold. The Canadian Peso (as it was referred to not that long ago) is now worth more than the USD.
Also, China is diversifying its USD assets, buying other currencies (sellings some greenbacks) and buying other assets including stock.
I think the US MUST raise interest rates or the USD will continue to fall, in which case all imported goods will go up in price and hurt the economy anyways. The Canadian dollar is up 26% against the USD this year ALONE! That ain’t some small number. Don’t forget Canada is the US’s LARGEST trading partner (yup, bigger than China!) and this price increase will hurt.
I don’t know what is going to happen in the US. If they raise their interest rate, they will amplify the subprime crisis. On the other hand, if the US money continues to drop is definitely not a good sign.
Maybe I should short sell US banks? As I am buying them with my Canadian Pesos, it seems like a good deal
Bernanke implied we’re in a period of stagflation I believe. At least that’s what it sounded like. If that’s the case, there’s pretty much nothing he or the FOMC can do to help. As much as I love Cramer, his Dow 14,500 mark will not happen by year’s end unless the FOMC sacrifices the dollar even more (if that’s even possible).
Nabloid, China has stated they MIGHT start selling off weaker currencies in exchange for stronger ones. This has yet to officially occur though as China has made statements like this before without taking action. Nonetheless it is still a very serious potential problem.
Most of the financial sector is a great short right now, and there is no reason to believe it is bottoming out either. And I agree Jorge, a 14.5 Dow is not feasible it seems right now
Funny enough, on a day where stocks are getting hammered, the entire financial sector is up and running. WTF? I’m glad I went all cash. I need a few days to reload. Fundamentals mean nothing it seems!