Dear Reader,

With almost every pullback in the market, the headlines have listed brief overviews of the daily winners. For example, a headline might read, “Stocks Decline, Treasuries, Gold, and Dollar Rally.” These broad headlines miss the more nuanced picture, especially of the gainers – some aren’t exactly doing so hot. One in particular is the dollar.

Sure, it has seen gains, but considering the large drops in the market the gains aren’t that impressive. In fact, these small advances shouldn’t reassure U.S. investors; they should frighten them. Consider that in mid-July the dollar crossed below the $1.40 threshold against the euro. Even with massive flights to safety, we’re still above the $1.40 mark now. Here’s a quick look at the EUR/USD over the last few months:

(Click on image to enlarge)

After looking at this chart, one must ask, “Where are the gains in the dollar from flights to safety?” The USD has mostly stayed within a volatile range of $1.40 to $1.46. In light of the recent market crash, the dollar has strengthened only minimally. In fact, a few periods have showed stronger dollar rallies with much less activity in the market. Compare the beginning of May, June, and July to the current movements in the dollar – all of those periods saw bigger gains.

However, the next chart is the most unsettling one. Let’s compare the current price action to the dollar’s strengthening during the 2008 crash. The difference is enormous.

(Click on image to enlarge)

Now that’s what I call a flight to safety. The dollar makes leaps in value in a clear trend. Only when the market calms down after this period does the dollar begin to slip against the euro.

In the recent selloff, we should be extremely concerned about the USD. With this sort of market environment and the serious problems in the eurozone, the dollar should be making enormous gains against the troubled euro, but it’s not. Instead, it’s barely inching forward. So, what’s going to happen when the risk-on environment returns? In my opinion, it could send the dollar tumbling.

We have two articles for you today. First, Alena Mikhan discusses silver’s recent price divergence from gold. Then Kevin Brekke presents an imagined conversation between Ken Starr and Tim Geithner. Finally, I’ll return with a couple of interesting links.

Food for Thought: Silver Drops on Panic

By Alena Mikhan

Silver has had an interesting week. After the U.S. credit rating downgrade and subsequent panic, silver rose 1.6% to US$39.86 per ounce on Monday, while gold added 2.1% relative to Friday’s closing price. However, on Tuesday silver started dropping as gold continued making nominal records. See the chart below:

(Click on image to enlarge)

If silver is a safe-haven investment, why would it move opposite to gold? Because – as we’ve long pointed out – the two metals are not the same; they move in different, though related, markets. Unlike gold, silver is largely consumed as an industrial metal. On Tuesday, fear of dropping industrial demand seems to have overtaken investment demand for silver as a monetary metal. Silver and gold exchange-traded funds moved in a similar manner: Shares of SPDR Gold Trust (NYSE.GLD) added 10.3% since August 1, while those of iShares Silver Trust (NYSE.SLV) declined by 1%.

At the beginning of the year, silver was widely talked about as a great investment opportunity. It certainly performed well last year. In 2010, silver was a great commodity to be in: It appreciated by 83.7%, from $16.86 on December 31, 2009 up to $30.94 on December 31, 2010. However, the metal’s price is extremely volatile – more so than gold’s – both on the downside and the upside. And that can create buying opportunities… such as we believe may be shaping up right now.

The key thing to remember, even as silver fluctuates more than gold, is that it eventually has always followed gold. It is a monetary metal as well as an industrial one. In fact, the word for money in Spanish, French, and other languages is “silver.” That means that if blood on the streets and panic in the broader markets push gold up while pushing silver down, silver should eventually rocket back with higher percentage gains. This is what happened after the 2008 crash, when silver corrected harder than gold.

While this is happening, great silver companies – with strong earnings and growth in production on tap – can go on sale. That’s just the sort of opportunity we love to take advantage of.

[Opportunities like this don’t come along regularly; and when they form, investors need to be ready to act. The analysts at Casey International Speculator can help you pounce on the right stocks at the right time – and will tell you when to exit, too. Start a risk-free trial subscription today.]

Ken Starr Talks with Tim Geithner

As imagined by Kevin Brekke

Ken Starr: Mr. Geithner, I want to, before I go into a new subject area, briefly go over something you talked about with the press.

You were asked by the press recently, and I quote, “Is there a chance that the U.S. would lose its AAA credit rating?” And you made a statement – made to and reported by the press – that there is no chance of the U.S. losing its AAA credit rating. Correct?

Timothy Geithner: That’s correct.

KS: In light of recent events, that statement is a completely false statement. Whether or not you knew of the impending downgrade by S&P, the statement that there “is no chance” of the U.S. losing its AAA credit rating was an utterly false statement. Is that correct?

TG: It depends on what the meaning of the word “is” is. If “is” means there never was nor ever can be, that is one thing. If it means there is presently none, then that was a completely true statement.

KS: You are the Secretary of the Treasury, and you tell the press that there is no chance that the U.S. will lose its AAA status. And you feel no obligation to do anything about that, make any kind of retraction or explanation, after the recent downgrade?

TG: I was not concentrating on the exact words I used that day.

Now, the press asked me on that particular day, in the present tense, is there a chance that the U.S. would lose its AAA rating, and I understood that to mean is there a chance that the U.S. could lose its rating on that particular day. With that understanding, I replied “No.” And it was a completely true statement.

KS: Was the press aware of this tense-based distinction you are making now?

TG: As I said, Mr. Starr, I wasn’t focusing on the exact words used during the questioning.

KS: I just want to make sure I understand, Mr. Geithner. Do you mean today that because you believed there to be no chance that the U.S. would lose its prime rating on the day the question was asked – and, indeed, did not lose its prime rating on that particular day – that your statement is literally true?

TG: No, sir. I mean that at the time of the question, generally speaking in the present tense, that anyone who may have asked if the U.S. is in danger of losing its AAA rating and answered “No chance,” would be telling the truth if that person understood the question to encompass the present day. That’s what I meant by that.

Not that I am – I’m not trying to give a cute answer. I am trying to say that, generally speaking in the present tense, if someone said that, that it would be true. But I don’t know what the press had in mind and didn’t pay any attention to that. I was focused on my answer.

Additional Links and Reads

Bank Stocks: A 1930s Redux? (Wall Street Journal MarketBeat)

This very short blog post has an interesting chart comparing the performance of bank stocks now and during the Great Depression.

As one can easily see, it’s not exactly the same story so far, but the chart does show how bad things could get from here. However, there is an explanation for the difference: During the Great Depression, the Federal Reserve was still tied to the gold standard. As such, it couldn’t print as much money as it may have desired. Many mainstream Keynesian economists have argued that the lack of a powerful initial monetary stimulus resulted in the poor recovery during the Great Depression.

We can’t go back in time and try a different policy, but an initial, powerful monetary stimulus is exactly what happened this time around. It may have initially pumped up the financials, but now we’re witnessing the policy’s failure. The bump after the initial fall could be partially explained from this difference in monetary policy.

Goldman Says QE3 Likely After dovish Fed Statement (Reuters)

There’s more to Goldman’s opinion than is presented in this short article. The Fed has promised to keep rates near-zero into mid-2013. That’s easier said than done. Sure, the Fed can influence the Fed funds rate, which has an indirect effect on long-term Treasuries – but for how long? The Fed can’t control the entire yield curve. It’s possible that the Fed won’t need any help, but I wouldn’t rule out a QE3 to push down other parts of the yield curve.

Gold Shines Brilliantly as the Ultimate Safe Haven (Motley Fool)

As I mentioned on Tuesday, gold is becoming a new safe haven. In this Motley Fool article, the author makes the case for gold as the “ultimate safe haven.” These types of articles should start to increase in number. There’s no mention of gold bugs or market pessimists. Rather, gold is simply analyzed as a smart choice.

That’s it for today. Thank you for reading and subscribing to Casey Daily Dispatch.

Vedran Vuk
Casey Daily Dispatch Editor