Wild Days for the Dollar, Oil and Gold

Last night, the US Senate passed the emergency bailout package, so the larded-up piece of legislation goes back to the House of Representatives. This is giving hope to investors, and so boosting the US dollar despite the measure’s $850 billion price tag. This morning, the ECB held firm on interest rates. This makes investors think the ECB is not responding fast enough to the global financial crisis, and sending the euro skidding lower.

It’s an upside-down world. Fiscally responsible behavior doesn’t matter anymore. In fact, investors are running from fiscally responsible behavior and cuddling up to Uncle Sam, who is injecting liquidity into the markets like high-grade smack. $630 billion here .. $850 billion there … hooray!

So, in the short-term, the dollar seems to be going higher, and oil and gold are going lower. However, I don’t think it will last long. We’re already hearing about miners and drillers canceling projects because they can’t get credit. This puts a crimp on future supply.

As for demand, well, oil demand is still rising in Asia and dealers around the world are running out of gold coins and bars. Why? Because precious metals have always been considered safe and their value rises in time of economic crisis. And while the bailout package may fix some parts of the economic crisis, it’s not the real, comprehensive fix that we might get if members of Congress weren’t running around like frantic firemen.

Still, you can’t argue with the short-term trend. Check out open interest in oil contracts (I picked this up from Chart of the Day on Bloomberg) …

I think prices could go lower, and we could even see a spike to the downside. But unless we’re in a severe recession, the pullback will be over sooner rather than later. And if we are in a severe recession? Or even worse? Then I think you’re going to want to own gold anyway, especially as the credit crisis puts a real crimp in new supply.

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