Preface xiii

Acknowledgments xvii

Chapter 1 Gold and the Dollar 1

End of Bretton Woods System Marks Gold’s Takeoff 2

Fed Tightening and FX Interventions Rein in Gold Rally 3

Central Banks’ Gold Sale Agreements 5

Gold-USD Inverse Relation 6

Recent Exceptions to the Inverse Rule 6

Using Gold to Identify Currency Leaders and Laggards 8

Gold’s Secular Performance 11

Valuing Currencies via Gold 13

Golden Correlations 14

Don’t Forget Falling Gold Production 16

Gold and Equities: Hard versus Monetary Assets 16

Equity-to-Gold Ratios 19

TheRoleoftheSpeculators 21

Gold Is Part of a Larger Story 22

Chapter 2 Oil Fundamentals in the Currency Market 25

From a Gold Standard to an Oil Standard (1970s–1980s) 26

Oil Glut and Price Collapse (1981–1986) 32

The Super Dollar of 1980–1984: The World’s Third Oil Shock 34

World Intervenes against Strong Dollar (1985–1987) 39

Iraq’s Invasion of Kuwait and the Gulf War (1990–1991) 41

The Asian Crisis and OPEC’s Miscalculation (1997–1998) 44

Oil Thrives on World Growth, Dot-Com Boom (1999–2000) 46

Iraq War Fuels Oil Rally, Dollar Flounders, China Takes Over (2002 to Present) 46

Summary 49

Chapter 3 When the Dollar Was King (1999–2001) 51

The Major Theories 52

Annual Performance Analysis of Individual Currencies 53

Summary 70

Chapter 4 The Dollar Bear Awakens (2002–2007) 71

2002: The Beginning of the Dollar Bear Market 71

2003: Dollar Extends Damage, Commodity Currencies Soar 78

2004: Global Recovery Boosts Currencies against U.S. Dollar 84

2005: Commodities Soar alongside Dollar, Carry Trades Emerge 90

2006: Dollar Vulnerable as Fed Ends Two-Year Tightening 94

2007: Record Oil Boosts Loonie, Helpless Fed Hits Greenback 102

Lessons Learned 108

Chapter 5 Risk Appetite in the Markets 111

Carry Trades in Foreign Exchange 112

Using Risk Appetite to Gauge FX Flows 121

Tying It All Together: 1999–2007 134

Chapter 6 Reading the Fed via Yield Curves, Equities, and Commodities 137

Yield Curves and the Economy 138

Types of Yield Curves 139

Rationale of Inverted Yield Curve Implications 142

Effectiveness of Yield Curve Signals’ Implications 142

Greenspan’s “Conundrum” Proved Bernanke’s Problem 143

Implications for Growth, Stocks, and Currencies 145

Tying Interest Rates to the Gold-Oil Ratio 153

Conclusion 158

Chapter 7 U.S. Imbalances, FX Reserve Diversification, and the U.S. Dollar 161

The U.S. Twin Deficits 162

U.S. Current Account Deficit: Old Problem, New Challenges 165

Adding the Budget Balance to the mix 169

Financing the Deficits: The Path to Unsustainability? 170

Dissecting U.S.-Bound Foreign Capital Flows 172

U.S. Stocks and Bonds Vie for Foreign Money 173

Capital Flows Shift Identities 177

Foreign Direct Investment and M&As 179

How Long Will Foreign Capital Be Available on the Cheap? 181

Don’t Ignore U.S. Investors’ Flows Abroad 182

Currency Reserve Diversification: OPEC and the Middle East 185

Further Currency Diversification Is Inevitable 187

The View Ahead 189

Chapter 8 Commodities Supercycles and Currencies 191

The Current Commodity Cycle versus Previous Cycles 193

Dissecting Commodity Classes 196

Commodities and their Currencies 207

Developing World to Maintain Ripe Outlook for Food and Grains 208

Energy Efficiency Not Enough to Halt High Oil 214

Copper and Gold to Shine on Long-Term Fundamentals 219

Commanding Heights or Common Bubbles? 223

Chapter 9 Selected Topics in Foreign Exchange 225

Revisiting Yield Curves 225

Is Dollar Stability a Necessity? 230

How Far Will Commodities Outstrip Equities? 236

U.S. Politics and the U.S. Dollar 240

Conclusion 247

Bibliography 249

About the Author 251

Index 253