Update - Dollar, Gold, Markets, Oil

The dollar may break out of its trading range and break to the down side to new lows.

Last week we talked about the Fannie Mae (FNM) and Freddie Mac (FRE) crisis which seems to look better thanks to dramatic steps by the U.S. Treasury and the Federal Reserve that were announced over the weekend.

On Friday federal regulators took over Indy Mac Bank based in Pasadena, California. Indy Mac was one of the largest savings and loans in the nation and has $32 billion in assets. They were a big lender of Alt-A risky mortgage loans.

The mainstream and financial media have been replete with reports and articles about our banking crisis and they have raised questions on which bank or financial institution would be next in terms of failure.

The FNM, FRE and banking crisis are weighing on the dollar as well as saber-rattling by Iran.

Here is a current chart of the dollar:

The U.S. senate has passed an extensive package of housing legislation and is considered the most aggressive steps so far to address the housing crisis. If our lawmakers can stop the erosion of falling house values and especially defaults, then the banking crisis could start to be resolved. We will write more about this later.

Gold ETF, Symbol GLD

The worsening banking and housing crisis and weaker dollar are good news for gold. Here is a current chart for gold:

Gold has broken out of its range on the upside with a gap and strong volume.

The choppiness indicator does suggest that the current trend is running out of energy and may consolidate.

The ultimately direction depends on the progress of the housing and banking crisis.

The Stock Markets

The stock markets are reflecting the poor economic, business and investing environment. The markets are now in bear market territory and have avoided the bear for most of the year. Let’s take a look at this bear market:

Let’s review the above chart:

- Prices peaked in October 2007 at 1576. One of the main definitions of a bear market is a decline of 20% from a peak. A bear market would take the S & P down to 1260 and it’s currently around 1220. In other words – we are in a bear market.

The average bear market is down about 30%. This means the S & P could fall to the 1100 area.

Also, most bear markets take about 12 months to find a bottom. That would mean we may not find a bottom until the October time frame (peak was formed in October).

Also once a bottom is found prices normally need to base for awhile. The longer the base in prices the better. A long base is normally followed by a major long-term move to the upside. The long-term base and current gold bull market is a good example.

- The January low was partly caused by falling European stocks due to a $7.1 billion trades loss by a rogue trader at the Paris bank, Societe General. Before the U.S. markets opened, the Fed announced an aggressive and unprecedented rate cut of ¾%. The Fed was preemptive and its actions caused the selling to stop and a rally followed. The Fed cut rates again a ½ point on January 20^th.

On March 17^th the Fed announced the rescue of Bear Stearns before the market open, and again their preemptive move caused the selling to abate and a rally to start.

In January and March the Fed was preemptive and their actions caused calm in the markets and then rallies. The markets never moved into bear market territory.

Here in July the markets aren’t so lucky with preemptive moves; however the Fed, the Treasury, the administration are working on the oil, housing, banking and credit crisis. If they can come up with solutions to some of our problems, then the markets can find a bottom and start to recover.

The major problem is housing. If action can be taken by the public and private sector to help homeowners keep their homes, then defaults can be reduced and all the bad paper, loans and investments have a chance of retaining some economic and investment value and some of our credit and banking problems could improve. As mentioned above, the senate is working on a $300 billion proposal to help the housing industry and homeowners. It’s possible that the legislation could be passed within a few weeks.

We wrote our book “The New Bull Market in Gold” in late 2003. Chapter 4, “Economic Troubles and Bubbles” was a key chapter as we saw the problems the economy faced and we’re seeing them realized now.

We posted Chapter Four on our website, here is the link:

http://www.goldandenergyadvisor.com/page/gez/specialreport/2007-08-13-035.pdf?sid=1216128428.24342

Here is what we wrote on page 43 (page 7 from the link above):

There are many problems that can occur with changing role of the Federal Reserve and banks:

1. Fed losing control of economy to the capital markets,

2. Loans not based on creditworthiness as in past but on loans’ marketability

3. Improper allocation of capital

4. Borrowing short term to lend long-term

5. Few understand all the derivatives that are being created

6. Credit booms lead to asset bubbles

The problems we saw in 2003 are being realized now.

Although we do have some hope that lawmakers, the Fed, and Treasury can come up with solutions for our economic problems, but as we wrote in 2003 and what we're worried about now is, “the Fed and world central banks are running out of ammunition to protect us.”

As we recommended then (2003) and what we recommend now - Make sure you have some gold to protect yourself.

Oil ETF, Symbol USO

Oil prices have been very volatile, up 10 points then down 10 points. Potential oil supply disruptions and hurricane season have investors worried, but the markets are now realizing the potential for a significant global slowdown, especially in the U.S. and Europe and this is causing prices to slip.

Here is a current chart for the oil ETF, USO:

There is a very good chance that prices will test support, around the 107 area. If prices don’t hold there, then a 50% retracement to the $100 area would be normal.

As we’ve written about before, we strongly believe speculators and investors are part of the equation that have led to record high oil prices. Speculators can now move to the sell side, and we wouldn’t be surprised to see prices sell down to the $100 area.

Technically, the choppiness indicator is at the mid-50 level, meaning it still has more energy for the current down trend. Most trends are exhausted when the choppiness indicator gets to the 30 level.

Volume is also picking up on the selling.

Of course a hurricane in the Gulf or any news of supply disruptions could send prices back to new highs.

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