This Smart-Money Indicator Points to a Dollar Rally
By Tom Dyson
February 22, 2008
A professional investor once told me, if you want to know where the euro is going, watch gold.
Gold is a small market compared to the market for currencies, so it's more nimble. When there's a big move in the currency market, you'll often see it first in the gold market, he said.
Here's another leading indicator. You can use the CRB Raw Industrials Index (CRB RIND) to predict the strength of the U.S. economy.
Twenty-two obscure materials like burlap, rubber, print cloth, wool tops, scrap metal, tallow, cowhides, lard, and butter make up the CRB RIND. These materials are essential to the production of most everyday goods we use. Factories buy these commodities at the initial production stage, so they serve as early indicators of changes in business activity.
Although the CRB RIND commodities trade in large volumes, they are not headline commodities and there are no big futures markets for trading them. There are no speculators to muddy the water. Purchasing managers at factories, distributors, and industrial suppliers dominate this market. It is smart money only. The CRB RIND is a better indicator of the true strength or weakness in the economy than headline commodities like oil.
As an aside, the CRB RIND hit an all-time high last week.
I found another leading indicator recently... This one predicts a rally in the dollar against the euro.
Let me explain...
The Baltic Dry Index is an assessment of the cost of moving raw materials – like iron ore, grain, and coal – by sea. Every day, a panel of experts at the Baltic Exchange in London analyzes freight rates from all over the world... and for every kind of vessel... and adjusts the index.
The Baltic Dry Index fell 50% between November 13 and January 29. On January 11, the index had its biggest fall since records began in 1985.
Why is this important?
Shipping is a good barometer of the global economy. When shipping freight rates fall, it's a sign that the economy is cooling. Right now, people think the massive decline in the Baltic Dry Index portends a recession. We can't know if they're right... but I'm interested in another angle.
Look at the following chart. It shows the relationship between shipping rates – as measured by the Baltic Dry Index – and the exchange rate between the dollar and the euro.
When Bulk Shipping Rates Fall, the Dollar Bottoms |
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As you can see, the two data series have a strong negative correlation. When shipping rates fall, the dollar rises against the euro. And when shipping rates rise, the dollar falls against the euro.
I think shipping rates lead the dollar. The market for shipping rates is a smart money market like the CRB RIND. Shipbrokers, freight forwarders, and the shipping lines dominate it. There are no speculators to obscure prices. Also, compared to the market for the dollar, it's tiny. The dollar is subject to millions of different forces... from Japanese central bank policies to British tourists planning a vacation at Disneyland. The Baltic Dry Index reacts only to changes in demand for shipping.
Right now, the Baltic Dry Index is sinking. But the euro is still close to all-time highs against the dollar. We know these two markets have a tight correlation. I think the Baltic Dry Index is the leading indicator here... and the euro is about to catch up...
My advice: bet the dollar rises versus the euro.
Good investing,
Tom
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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