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Dollar Down, Gold Up. What Does It All Mean?



September 24, 2010 – Comments (0)

This morning December spot gold is trading at the new all time high of $1300.00 an ounce. Ever since Federal Reserve Bank Chairman Ben Bernanke gave a speech in Jackson Hole, Wyoming on August 27th indicating that the central bank could and will do more to flood the market with liquidity should the economy start to slow down. Since that time the stock market has gone into rally mode. However, gold began taking off to the upside around July 28th. This tells us that quantitative easing was already taking place and money was being printed and pumped into the very fragile system. How much higher can gold go from here? Well, how much more money can the Federal Reserve Bank print without the stock market reacting negative?

The U.S. Dollar Index has continued to tumble sharply lower since June 7th, 2010 when it reached a yearly high at $88.70. At one point in May and June of 2010 gold and the U.S. Dollar Index actually traded higher together as gold was part of the fear trade. Now gold is obviously part of the inflation trade. Therefore, when the U.S. Dollar Index declines the stock markets will inflate and trade higher. As we all know by now the opposite is true when the U.S. Dollar Index rallies or trades higher the major stock market indexes will decline and deflate lower. This morning the U.S. Dollar Index is trading at $79.38.

At this time the Federal Reserve Bank has successfully printed the stock market out of trouble whenever it looks close to a major breakdown as it did in late June. The Federal Reserve Bank and the global central banks are try desperately to inflate this economy back to health. So far it has worked, however, an individual or a family could not borrow or print there way out of a problem. Therefore, should the printing presses ever stop or should the money dilute to a worthless status it will not be a pretty situation for the new global economy. That is even true for the highly praised savior of the world, the Chinese economy. Who will the Chinese have to export their goods to? In any case, today the stock markets are back in jubilee mode and the inflation rally is still alive. Stay tuned as this could get very interesting soon.

Nicholas Santiago
Chief Market Strategist

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