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Gold and US Dollar Counts - Nov 09

Recs

22

November 03, 2009 – Comments (10) | RELATED TICKERS: CEF

This post will contain some of my updated counts for Gold and the US Dollar.

Please read these posts first so that you will understand the context for these counts:

-- The Gold Blog. Gold/Silver/GSMs (and a little Oil for good measure) -   Sep 11, 09
-- Thoughts on the US Dollar, Analysis of the USDX Long Term, Follow up on the Gold Blog -   Sep 17, 09
-- Thoughts on the Dow/Gold Ratio -   Oct 19, 09

Some commentary before the charts:

I believe the Dollar has bottomed for the short term and the US Equity Markets have topped (for the long term). There is still inverse correlation between Dollar/US Equities. And likely this will come with pronouncements of deflation.

As long as there has been and continues to be a Federal Reserve no outcome has ever been deflationary nor will deflation be in our future.

Deflation is monetary deflation. The rise or fall of the price of asset classes is NOT inflationary or deflationary. Moreover, the falling price of the most visible asset class (US Equities) is NOT evidence of past or future deflation.

Even further, because the outcome is and will continue to be inflationary, many will fall under the theory that this will help US Equities to rise in nominal terms. Again, a very incorrect assumption. Inflation will help asset classes with poor fundamentals (US Equities) from falling as far as they otherwise would. But fall they will. Which is a demand issue not a deflation issue.

The long term relationship of the US Dollar to US Equities is positive correlation. Here is an excerpt from my massive US Dollar Post (link above):

By and large, there is **far more** positive correlation between the Dollar and Equities than there is inverse correlation. They both go up and down together as evidenced in the chart above.

However, many others including myself, have observed that the "weak dollar" is currently fueling the the equity rally right now. So why the discrepancy?

Because you need to realize that we are still in the aftermath of the Greatest Deleveraging Event in History (2008)!

During the meltdown of 2008, everything was sold / redeemed for the relative "safety" (used exceptionally loosely) of Treasuries: shares in hedge funds, commodities, stocks, etc. As such there was a massive dollar repatriation. The dollar didn't gain value because it was strong! It did because it was "in the way" (you have to buy dollars in order to buy treasuries, it is sort of a necessity that way).

In the ensuing months we have seen the Fed ream bondholders through ever more massive QE salvos, intentionally destroying the "value" of US Treasury debt and the US Dollar. Since that time, money has been moving back out of Treasuries (putting downward pressure on the dollar) and into more speculative endeavors (the stock market). You can see here that there is not a "if the Dollar goes down then Equities must go up" relationship here. Money was leaving treasuries and equities were oversold so they were bought. That's it. Another force at work is the fact that the weak dollar and the oversold nature of equities a few months ago made stocks attractive to relatively stronger foreign currency holders, who could "get more bang for their Euro" so to speak.

You can see that the current inverse relationship between the Dollar and Equities is a product of a very particular setup and is not a given. In fact, the relative valuation of all of these asset classes (Treasuries, Dollar, Foreign Currencies, and US Equities) has shifted a lot the last few months. Anybody expecting this "status-quo" relationship to persist much farther into the future is going to be rudely surprised.

So what about the future? Are the deflationists right? Does all the world's money rush back into Treasuries and the US Dollar during the next crisis? Any claim of a "strong dollar" is bunk. The Fed has made it abundantly clear that QE is not going anywhere and they are getting more aggressive with Treasury purchases, not less.


Which brings up the next interesting observation.

The POMO fund pool is nearly done. The US Equity markets have also topped and are headed down. There has been a lot of talk about not renewing the Quantitative Easing funding (i.e. money printing). So what are we going to get? A gold star to those of you who answered "Deflation Scare".

Yep, deflation will again become the hot buzz word. Everybody will see stock prices plunging and politicians (Congress / Treasury / Fed) will look like they are trying to *do something* (... the Treasury and the Fed are in more desperate straits however. They know that the US Government is insolvent and are just keeping the game going since foreign governments are not buying Treasury debt anymore / to a significantly lower degree. The Fed is the only body keeping the long end of the yield curve down).

A nice way to guarantee authorization for QE-II (and no, not the ship) is to allow the long end of the yield curve to rise while stock prices fall.

However, whether QE gets renewed, or QE-II is passed or QE comes into existence under a different name, the road of debt monetization is firmly paved. And no side streets are being built.

So if you are long the US Dollar to play the bounce for a couple of months - good call

However if you are long the US Dollar because you think it put in a *major* bottom, and that it is fundamentally stronger (relative to other currencies, including and most especially gold) .... good luck with all that.

So a valid question is: will another round of Quantitative Easing and associated POMO be enough to start another large rally? I think the answer is no. The last rally occurred because of highly oversold conditions, huge bearish sentiment, money looking for a move out of "safe haven assets" (after the rush into those assets from the Great Deleveraging Event of 2008) and into higher returns.

The Fed and Treasury pulled a rabbit out of the hat for equity investors based on a massive liquidity injection during a very particular set of circumstances.

There are no more rabbits. Just a lot of empty hats.

 

 

.... continued in comments section ...

10 Comments – Post Your Own

#1) On November 03, 2009 at 4:35 PM, binve (< 20) wrote:

Gold Counts and Charts

I am very bullish on gold... no surprise. Both fundamentally and technically.

Undoubtedly, there will be some of you who look at my counts and charts and will say that my Fundamental Analysis is biasing my Technical Analysis.

You are welcome to that opinion.

I think the fundamentals of gold are strong because a) All of the QE and the Fed buying US government debt with money created out of thin air is not only fiscally irresponsible but shows how *our elected and unelected officials will always take the path of expedience to avoid short term pain at the cost of larger long term pain*, b) that financial shenanigans are the norm, financials will always get bailed out, and are the biggest threat to the US economy, which ties into point a, and c) the result of all these bad decisions will be monetary inflation, in a huge way.

And I think the technicals of gold most especially reflect the history of monetary inflation and bad / expedient policy decisions for dealing with economic issues.

I fully expect the occurrence of bad economic decisions to increase, not decrease, which again is bullish for gold. If you want to put your faith in government economists, politicians and the US Dollar, then please feel free to interpret the charts and long term counts differently.

Again, I am going to ask you to read this post first before interpreting my charts below: The Gold Blog. Gold/Silver/GSMs (and a little Oil for good measure)



















Long Term Correlations





US Dollar Counts and Charts

Again, I am going to ask you to read this post first before interpreting my charts below: Thoughts on the US Dollar, Analysis of the USDX Long Term, Follow up on the Gold Blog







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#2) On November 03, 2009 at 4:53 PM, outoffocus (22.75) wrote:

Look Ma! No beany!!

Sorry I couldn't resist.  This is the first time in 6 months I closed the day with a rating above 20. I dont expect for it to stick so I'm milking it for all its worth.

In other news, it seems like the inverse dollar/commodity relationship is starting to break a little bit. Correct me if I'm wrong but I thought I saw a couple days last week and this week where the dollar increase but some commodities (gold and oil) also increase a little.  Is this relationship starting to decouple?

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#3) On November 03, 2009 at 5:34 PM, binve (< 20) wrote:

outoffocus ,

LOL! I hear you, need to grab the small victories :). binve has barely clung to his while cap (actually lost it several times). But binv271828 is still languishing in single digits :( ... :)

In other news, it seems like the inverse dollar/commodity relationship is starting to break a little bit. Correct me if I'm wrong but I thought I saw a couple days last week and this week where the dollar increase but some commodities (gold and oil) also increase a little.  Is this relationship starting to decouple?

Yes indeed. Also if you look at the middle section of charts above labeled Long Term Correlations (charts 10 and 11), you will see where I identify where gold and the Dollar rise together. This happens during the beginning or in the middle of a crisis. And I think that could easily describe the situation now.

Thanks!.

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#4) On November 03, 2009 at 5:40 PM, 4everlost (29.35) wrote:

What awesome work once again!  I think I'm actually learning how to read some of the charts...The fundamental analysis and macroeconomic thoughts are very valuable.  I gave you Rec #10

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#5) On November 03, 2009 at 6:02 PM, jstegma (29.15) wrote:

Deflation first, then inflation later.  If you want to buy gold, wait until it's cheaper.  You probably have point in the long run, but right now the economic fundamentals just don't support inflation in the short term.

Headlines from the current inflation camp:

"Unemployed workers refuse to work unless given higher wages!"

"Stores raising prices to offset lower demand for products!"

 

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#6) On November 03, 2009 at 6:03 PM, jstegma (29.15) wrote:

Deflation first, then inflation later.  If you want to buy gold, wait until it's cheaper.  You probably have point in the long run, but right now the economic fundamentals just don't support inflation in the short term.

Headlines from the current inflation camp:

"Unemployed workers refuse to work unless given higher wages!"

"Stores raising prices to offset lower demand for products!"

 

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#7) On November 03, 2009 at 6:18 PM, portefeuille (99.66) wrote:

If you want to buy gold, wait until it's cheaper.

If you want to buy gold, consider buying it while it is still in the ground. My favourite gold stock is SA.

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#8) On November 04, 2009 at 3:21 PM, XMFSinchiruna (27.35) wrote:

binve ... you are building the stiff of legend one incredibly thorough blog post at a time! Great work!!

76 remains the key pivot point on the USDX. It would take a drastic, panic-driven equity sell-off in my opinion just to bump the USDX back up to 80, but that's not say it's unlikely. I've been anticipating an equity reversal for months, and making the call too early has not altered my conviction one iota. So I would say to JStegma, if you want to buy stocks, wait until they're cheaper. :)

Today's break back below 76 doesn't bode well for the greenback, and if it doesn't recapture 76 soon we could see an even more ridiculous extension of the equity rally built atop severe dollar devaluation. There are no significant points of support for USDX between 76 and the all-time low around 71. 

It is looking more and more likely every day that $1,000 will now hold as a long-term floor beneath the gold price, so all you Fools waiting around for $600 gold to buy in are assured of missing the boat unless you reassess your outlook. There will be a mountain of buying support below $1,050 where India did its buying last month. $1,023 is further support. And $1,000 is very strong as the "3-times and out" point for the entire 18-month correction. If somehow $1,000 is broken, though I now consider that unlikely, $980 will hold.

Prior to the revelation about India's purchase, when gold was backing away from $1,070 on its way into the $1,020s, I offered further support points below $980 that I no longer consider likely enough to be tested to merit their mention. I have some cash on the sidelines at this point (about 10%), and will be dipping back in at each of the levels listed above. 

I remain about 80% long precious metals, about 5-10% energy, and the rest cash. My silverminer portfolio is loving life, as I continue to mimic some of my shorter-term trading that I do as a hobby with only about 5% of my real-life portfolio.

The most important thing for gold investors right now is to be sure you're not getting too cute in trying to time near-term channels. The number of potential headlines that propel gold beyond $1,200 in a virtual heartbeat is staggering. Certainly not a time to pile into miners indiscriminately, but nor is it a time to lack substantial exposure. I think we'll see tons of volaility going forward, but perhaps not another large correction until at least $1,250 ... where another re-test of $1,000 becomes technicaly feasible. $100 daily swings in the gold price will eventually become commonplace. We are in for one heck of a ride.

Silver, by the way, is a coiled spring. Recall that when gold hit its 2008 high some $70 below our present price, silver traded above $20 per ounce. Silver will correct out of this altered ratio and surge strongly back to 50:1 for starters, which makes a $25 12-month target for silver extremely conservative given my expectations for gold ($1,650 by early 2011 ... aligned with Jim Sinclair on that one).

These are just my thoughts on the topic, which I thought I would hastily add amid my mad rush to cover earnings and other developments. :)

Fool on!

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#9) On November 04, 2009 at 4:33 PM, binve (< 20) wrote:

TMFSinchiruna, Thanks man, I appreciate that !!

I agree, my near term (<6 month) target for the Dollar is 80-82. It is a reaction move to oversold conditions, nothing more. There is nothing fundamentally making it stronger. And in fact all of the recent policy decisions have guaranteed when it starts falling again, it will fall hard.

Moreover, if you look at the last chart (US Dollar Index long term) you see that we are right in the middle of a huge resistance zone. 

So the technicals do not support a *major* dollar rally (just a relatively short term correction) and the fundamentals certainly do not.

The most important thing for gold investors right now is to be sure you're not getting too cute in trying to time near-term channels.

Exactly. That is why my first chart is a 20 year Monthly chart. I like showing this one because it removes the noise of the Daily and Weekly charts (since gold is so volatile because of the emotion it stirs up) and shows the *real* technical bullishness of the rally (several intact long term trendlines, RSI clearly channeling with a nice healthy move and no divergences, Upturn on MACD and stochastics, etc.)

Thanks for the comments my man !! Fool on !!..

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#10) On November 04, 2009 at 5:08 PM, silverminer (30.99) wrote:

Of course, gold remains a coiled spring! :)

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