Is the Dollar Being Removed from Oil Trades?

Today we’re already seeing a HUGE currency rally versus the dollar, on the news that the Reserve Bank of Australia (RBA) opted to go ahead and hike rates now, rather than wait for November’s meeting… Which I thought they would do! WOW!

The first hike has opened Pandora’s Box of interest rate hikes around the world… For if the RBA went this soon, then we can expect Norway’s Norges Bank to push their rate hike earlier on the calendar… Maybe even later this month! And they won’t be the only ones! Look for New Zealand to hike rates this year, and who knows what other country (Brazil?) will follow after that… But I see them coming, and they’re sounding the death knell of the dollar!

OK, that’s a little dramatic, and although I have more doubts every day, I don’t really believe that the dollar will collapse to nothing… But I do believe it has a long way to go when it comes to weakening. How else will the US pay back their debts in the future? It sure won’t be because of a cut in government spending! That is… Unless all this deficit spending can be reversed and government is cut (in size) to resemble something from 50 years ago! But, that’s like asking for the moon and sky, eh?

Let’s get back to the Aussie rate hike… That’s more exciting and upbeat than talking about what’s going to be needed in the future here in the US! The statement that followed the RBA rate hike, was very upbeat… So… I totally expect another rate hike next month from the RBA!

OK… The dollar’s weakness this morning isn’t all due to the Aussie rate hike, and prospects for other rate hikes around the world… In 2001 I wrote a whitepaper called “The Demise of the Dollar”… This was the thesis for all the things I talk about almost daily regarding the reasons the dollar would go into a secular bear market… And this was one year BEFORE the dollar entered into a weak trend in February of 2002!

The reason I bring this up here in 2009, is that there is an article in the UK Independent that’s making the rounds, that’s called… “The Demise of the Dollar”! This report, though is about secret meetings with the Gulf Arabs along with China, Russia, Japan and France, and they are planning to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen (JPY) Chinese yuan (CNY), the euro (EUR), gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

Uh-Oh… That’s serious stuff, folks… And that death knell I talked about above? Well, if this story is true, that death knell just became much louder!

Right now, however, the markets aren’t taking the story to heart, just yet… Yes, the dollar has been sold, but not like you would think… I think some digestion time needs to be had first. I mean the currency traders had the first rate hike and then this story on their plates all at one meal. That’s a lot to digest! And Besides… The Saudi Bank Governor is denying that any of these meetings took place… Of course, to conspiracy buffs like me, that’s akin to saying, “These meetings DID take place, and we’re just covering up the evidence.” HA!

Now… Some might be cursing these countries right now, for dealing this rumored blow to the dollar… But, it’s not like the dollar didn’t have it coming! The deficit spending, for instance, is one thing that many people realize the US will not be able to climb out from under… And those knuckleheads who said that “deficits don’t matter”? Well… I’ve said this many times before, but I can’t talk about the “deficits don’t matter” crowd without talking about that old joke… A guy jumps off the Empire State Building, and as he passes the 56th floor, he says… “So far… So good!”

Well, unfortunately for our “deficits don’t matter” guy falling to the ground, the sidewalk is coming at him very quickly now.

And here’s another thing that should just tick you off to no end… You have to think that the people who’ve loaned us money are wondering if they’ll ever get paid back… What I’m talking about here is the story from yesterday, regarding the TARP funds… You might want to sit down for this one, folks.

Neil Barofsky, the special inspector general for the Troubled Asset Relief Program (TARP), says that despite multiple statements on October 14th of last year saying that these nine banks were healthy and only receiving government funds for the good of the country’s economy, federal officials knew otherwise. He went on to say that “the Treasury Dept. and the Federal Reserve lied to the American public last fall when they said the first nine banks to receive government bailout funds were healthy.”

That’s right… They LIED TO US! Now, doesn’t that just tick you off? It sure ticks me off!

So… You can see some of the reasons the countries mentioned above might be thinking about removing the dollar as the pricing mechanism when it comes to oil.

OK… We started upbeat, then got brought down, let’s get back to upbeat! Hey! How about gold? When I turned on the screen this morning, gold was $1,020! You would think that even if the UK Independent story is just a rumor, that gold would gain on the rumors.

I read a story last night while waiting for the so-called “Epic Battle” between the Vikings and Packers on Monday Night Football, that one analyst was of the belief that gold was about to return to its link to the price of oil… Hmmm… Well, I personally hope that’s not the case, as I certainly don’t want to see the price of oil rise to the levels I think gold is going to rise to!

One thing that we’ll begin to see this month is the earnings season…

You might recall that in previous quarter-ends I thought that stocks would get taken to the woodshed, because of lousy earnings, only to be surprised at the earnings that were posted… But trying not to be the boy who cried wolf, I’ll once again say that I just don’t see the earnings to support stock prices. This time I think we’ll see that the method used in previous quarters by Corporations to produce the earnings was cost cutting… One would have to think that the Corporations have cut to the bone… And now, we’ll get to the cheese that binds for earnings… A lack of revenue.

I really liked the reaction of the non-dollar currencies, led by the Aussie dollar (AUD), after the RBA rate hike… It was like “old days”… Well, in this case I am talking about currencies trading on “fundamentals” not stupid trading themes, not flights to safety, not deleveraging, but plain and simple fundamentals, things that ordinary people, like me, can understand, and place a value on a currency-based on the fundamentals!

But… We’ve not really seen a fundamental trend since July of 2008… However, if we begin to see the rate hikes that I think we’ll begin to see, it could be the harbinger of a return to fundamentals… And that, my friends, would be like manna from heaven for your Pfennig writer!

Well… Since I came in this morning, gold has gained $5 more, to $1,025! Looks like the all-time high of $1,033.90 that came in March of 2008, could be in jeopardy.

Maybe gold moving higher can get silver going too!

OK… To recap… The RBA did raise rates 25 BPS last night, and sounded quite upbeat in their after-rate-hike statement. Look for other countries to follow now that Pandora’s Box of rate hikes has been opened. There’s a story going around about countries banding together to remove the dollar as the pricing mechanism for oil trades… It’s being denied, but there’s smoke… And you know what I say when there’s smoke… And gold is pushing the envelope on its all-time high of $1,033.90.

The Daily Reckoning