Dollar Plummets, Gold and Oil Skyrocket, China Threatens to Dump the Dollar, Michael Jackson’s Foreclosure, and More!

by Addison Wiggin & Ian Mathias

  • How two Chinese men just put the dollar in the all-time dumps
  • Gold 1% below all-time highs… Bugos shares his short-term outlook
  • $98 oil… why Kevin Kerr is thankful for the coming $100 barrel
  • What’s a surer bet… Brazil’s economy or Merrill’s future? Eric Fry on the unlikely answer
  • Dan Amoss explains GM’s massive third-quarter loss… the second biggest in S&P history
  • Jackson about to lose the Neverland Ranch… could the subprime mess sting the King of Pop?

“The world’s currency structure has changed; the dollar is losing its status as the world currency,” said Xu Jian, a Chinese central bank vice director, yesterday. “We will favor stronger currencies over weaker ones, and will readjust accordingly,” confirmed Cheng Siwei, vice chairman of China’s National People’s Congress, at the same conference.

And that was all she wrote for the U.S. dollar.

While China has yet to formally announce a change in its foreign exchange reserves, the allusion was enough to spook traders. Here’s the breakdown:

Euro: $1.47 — an all-time high versus the dollar
Pound: $2.10 — 26-year high versus the dollar
Canadian dollar: $1.10 — rose almost 2 cents in one day, a new all-time high
Australian dollar — 93.9 cents — gained over a cent overnight, to a new 23-year high
Yen: 113 — gained a full point versus the dollar to 2-month highs
The dollar fell against every other actively traded currency… 16 in all.

Profit-taking has since chased down several of these currencies from their peaks, but as we write, all remain above previous highs.

For its part, the dollar index fell an entire point overnight, to 75.20 — a new all-time low.

Since the Fed cut the discount interest rate on Aug. 17, the dollar index has lost over 6 points. At some point, you’d expect to see a healthy contrarian rally… but there’s nothing stopping bearish sentiment today.

“Construction workers in the booming Arab emirate are increasingly unhappy,” reports The Economist in its latest issue, highlighting an overseas effect of a weak dollar. Last week, thousands of angry workers went on strike for two days, demanding an increase in wages. Inflation in Dubai is “officially” estimated around 10% this year, but if the UAE government is anything like ours, it’s probably a lot higher.

“The falling value of the dollar has also affected workers, especially the unskilled and semiskilled. Remittances in dirhams, the UAE’s dollar-pegged currency, are worth less back home, particularly in India, where the rupee is gaining strength,” reports The Economist.

Gold prices soared on news of a weaker dollar. Surging as high as $844 and now holding at $840, a new all-time high for gold seems possible by the end of the week.

“We have seen a $200 advance since August,” notes Ed Bugos. “The market is only $10 away from its record $850 high, made in 1980.

“Technical analysts measure the potential for a move by the size of the consolidation pattern preceding the breakout, or the size of the move preceding the consolidation. The 10-month triangular pattern, which occupied the latter two-thirds of 2006, implied a 35% move from the breakout point — from $650 or $700 in this case. That suggests a target price between $875-945 for this move. But a repeat of the sort of run that occurred in 2005-06, which is possible, would extend that target to about $1,090.

“I know it’s hard to put faith in the tea leaves. They are just a tool. Sometimes they don’t help very much. But they have served my forecasts relatively well for many years — and they do work for gold too, usually. My personal feeling is that we’ll see gold peak at the 1980 high, and then fall back 50-75 points this year, before lunging at four-digit territory (i.e., above $1,000).”

Luckily for you, Byron King has found a way to buy gold for pennies an ounce… which you can learn about here.

Also worth noting, silver has soared beyond the $14.85 pennant top we reported to you Monday. It has since skyrocketed through $16, retreated slightly, and currently trades for $15.70.

Thusly, silver finally enters 26-year highs of its own. For what it’s worth, when silver last broke through a similar pennant consolidation in late 2005, prices doubled in five months. Don’t forget, if you’re looking to benefit from a possible silver price explosion without market exposure, check out EverBank’s MarketSafe Silver CD.

Oil prices also responded to the increasingly weak dollar, rallying as high as $98 this morning. $100 oil… please… it’s in the bag, baby.

“Do I think $100 is the ‘top’?” asks Resource Trader Alert’s Kevin Kerr. “Not by a long shot. I fully expect that $90 is the new baseline and the accurate crude price is more like $150 right now and looks like $200 by end of 2008. Throw in another terrorist attack on Saudi or American oil terminals and you can move that timeline forward six months. Can the economy survive with oil at $100 and gasoline at $5? Sure, it can. Most of Europe, including where I have a home in Estonia, are subject to gasoline that is about $7-8 per liter.

“I for one welcome $100 oil with open arms,” continues Kevin, perhaps in a manner more optimistic than your faithful editors. “It could be the flashpoint that reignites the American entrepreneurial spirit to extricate ourselves from our addiction and do what we do best, innovate and overcome.”

Don’t forget… The Energy and Scarcity Investor launches this Friday. Stay tuned…

“For the first time ever, investors consider Brazilian government bonds safer than Merrill Lynch bonds,” writes Eric Fry. Yesterday’s news of a certain Brazilian supermodel ditching the dollar must have pulled Mr. Fry’s attention away from New York and toward South America.

“According to the relative pricing of credit default swaps (CDS) on Brazilian government debt versus Merrill Lynch debt,” Fry notes, “the reeling American brokerage firm is a riskier credit that the resurgent Latin American economy.

“Buying five years of protection against a Brazilian default used to cost much more than buying five years of protection against a Merrill Lynch default.

“But now that Brazil has become as crisis free as the U.S. financial sector has become crisis prone, CDS prices have flip-flopped. Merrill CDS prices have jumped above those for Brazilian government debt! In other words, CDS buyers consider a Merrill Lynch default more likely than a Brazilian default.

“Maybe CDS investors have got it all wrong…or maybe the U.S. finance sector is in much deeper doo-doo than most investors believe. The ‘doo-doo’ interpretation seems more plausible.” For more on the subject (including another shameless photo of Gisele in a Victoria’s Secret runway shoot), reread your daily Rude Awakening here.

We noted with irony yesterday that the “committee” of economic players who cleaned up essentially every crisis since 1990 were being called to action to “fix” the subprime fallout. Well… add this name to the list: Richard Stuckey.

Stuckey, the man once tasked with unwinding the LTCM crisis, has been appointed the head of Citigroup’s new “Subprime Portfolio Group.” Citi created this group on Nov. 4 after it admitted as much as $11 billion in additional write-downs. Stuckey will try to assign value to the subprime assets on Citi’s books. Some estimates put those troubled loans in the $43 billion range.

The U.S. stock market enjoyed a rare day in the black yesterday. The benchmark indexes rose about 1% each. Energy and material sectors led the way, with over 2.5% gains each. Positive reports from Time Warner and Microsoft helped kick-start the buying.

The former largest automaker in the world, GM, announced a staggering $39 billion loss in the third quarter. Shares fell over 5% in premarket trading after the U.S. automaker revealed the second largest quarterly corporate loss for an S&P 500 company…ever.

GM attributed the losses to a somewhat complicated charge involving unused tax credits, as well as mortgage losses from its since divested financial arm, GMAC.

“This loss is an admission by GM,” explains our in-house CFA and editor of Strategic Investment Dan Amoss, “that it isn’t likely to earn the tens of billions in profit that would make the tax credits useful. Deferred tax assets only have value for companies with profitable futures. It shouldn’t be surprising, but this news does come as a shock to GM stock fans, who have been bidding it up on hopes that sustainable profits will one day return.”

The company was happy to report, however, that without these “special items,” it managed to lose only $1.6 billion last quarter.

Mortgage application volume fell 1.6% last week, according to this morning’s Mortgage Bankers Association report. Of all the most recent mortgage applications, almost half were refinance applications. The MBA’s application index now stands at a score of 670, down a tad from 2003’s high of 1,856.

100 is the benchmark for the index. It represents the application volume in 1990.

Michael Jackson, the “King of Pop,” is on the verge of having the Neverland Ranch foreclosed. Apparently, the freak has defaulted on a $25 million loan.

Jackson’s loan was secured against the deed of trust for his 2,800-acre “private amusement” park. He has 90 days to fork over the $25 million or the ranch will be property of Delaware loan firm Fortress Music Trust.

Already tied up by multiple lawsuits and other loans, many speculators believe that Jackson won’t be able to keep the ranch, and might even declare bankruptcy. Sigh. If you have young children, you can rest a bit easier now.

“I do not understand: Why didmy shares of PetroChina go down $32.96 a share today, given that report on how well it’s doing?” asks a reader. PetroChina’s market cap more than doubled on Monday after its Shanghai IPO… but prices fell here in the U.S. and in Hong Kong.

The 5 Responds:
“PetroChina sold 2.2% of itself to the Shanghai market,” says our Chris Mayer. “Those shares took off from an opening price of 16.70 yuan to close at 43.96 yuan on Monday. Using that price on the 2.2% and applying it to the remaining 97.2% shares, would give you a trillion dollar company. That’s twice as big as the current ‘biggest company in the world,’ Exxon Mobil.

“But here’s the problem with that. The shares of PetroChina already trade in Hong Kong. If you use the price of the shares in Hong Kong, it’s worth only about $400 million, about $90 billion behind Exxon Mobil. Even so, 86% of the shares are in the hands of the Chinese government and don’t trade at all.

“So it is difficult to know what the market price of PetroChina really is. I’d throw out the Shanghai price. It’s an artificial market — Chinese investors can’t invest significantly outside of China, for one thing. And foreigners can only invest small amounts in certain shares. I think the bigger and more liquid Hong Kong market price is the best market price.”

Another reader sent this nugget from The Associated Press in response to a reader’s comment that he went to the Canton Fair in Guangzhou and found it void of Americans importers:

“Australian officials ordered a popular Chinese-made children’s toy pulled from the shelves after scientists found it contained a chemical that converts into a powerful “date rape” drug when ingested.

Three children have been hospitalized over the past 10 days after swallowing beads from Bindeez, named Australia’s toy of the year at an industry function earlier this year.

“The beads in the toy, sold by Australia-based Moose Enterprises, are arranged into designs and fuse together when sprayed with water.

“Scientists say the beads contain a chemical that the human body metabolizes into the so-called ‘date rape’ drug gamma-Hydroxybutyric acid. When eaten, the compound — made from common and easily available ingredients — can induce unconsciousness, seizures, drowsiness, coma and death.”

The 5 Responds:
Hmmmn… what are they building over there?

Best Regards,

Addison Wiggin
The 5 Min. Forecast

Dollar Slumps to Record on China’s Plans to Diversify Reserves
Silver hits its highest mark since 1981
Michael Jackson defaults on $25m loan
Australia pulls ‘date rape’ drug toy


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