Clive Maund
gold, silver, & oil shares


THE DOLLAR - another upleg, or GAME OVER??...

originally published March 16th, 2010

There is, as ever, a wide range of opinion on where the dollar is headed. At one end of the scale we have the likes of Peter Schiff, who believes that the dollar is fundamentally grossly overvalued and has been rising in the recent past in large part as a result of the crisis in the European Union centred on Greece, and that the moment this starts to ease the dollar will plunge to new lows as its fundamentals are considerably worse than in 2008. At the other end of the scale we have the Elliott wavers such as Prechter and Ron Rosen, who are looking for another deflationary downwave and continued strong gains in the dollar as a result. Here it should be pointed out that Schiff has a much better track record than most of these wavers, who tend to talk about future market developments as if they have climbed into a time machine and zoomed forward a year or two and ripped a page of charts out of the Wall St Journal and then raced back to the present to alert the world to their findings - keeping quiet about the time machine, of course.

Our approach is pragmatic - we let the charts tell the story and divine, as best we can, the probable future course. The dollar index chart alerted us last year to the likelihood of this latest dollar dollar rally before it began, due to our having correctly identified a clear bullish Falling Wedge. So what are the dollar charts saying now?

On the 6-month dollar index chart we can see a fine uptrend in the dollar that must be presumed to remain in force unless and until the dollar clearly breaks down from it, especially as this channel is parallel, not converging. There have been 2 clear impulse waves thus far followed by 2 reactions, with the 2nd reaction having just completed upon contact with the lower supporting trendline of the channel. The big question now therefore is whether we are going to see another impulse wave begin shortly or whether the dollar has just topped out following an A-B-C rally and is set to break down and drop away. With the Full Stochastic and MACD neutralising there is certainly "enough gas in the tank" to fuel another rally, and as already mentioned the parallel boundaries of the uptrend channel imply that upside impetus is not failing, and furthermore there was a bullish moving average cross last month that may soon result in the 200-day moving average turning up. All of these factors suggest that it is safest to assume that the dollar's uptrend will continue until proven otherwise by a clear trendline failure. Here we should note that even if the dollar's uptrend fails it may move sideways for a while above the upper support level shown, marking out an intermediate top area, before probably breaking down and dropping.

It is worth briefly comparing the dollar's current uptrend with the major rally that occurred in 2008, for which purpose we will refer to a 3-year chart. The first thing we notice is that the current uptrend has a more modest rate of ascent and is more orderly. This reflects the 2 very different realities driving the respective uptrends. The uptrend in 2008 was a spectacular spike driven by the mass liquidation of assets, in particular commodities and stocks, the proceeds of which cascaded into Treasuries, which meant that dollars had to be purchased for this purpose. The situation today is very different - money has not - yet - fled either commodities or stocks and instead the dollar has been rising because of the severe monetary crisis gripping the EU, centered primarily on Greece but also on other countries such as Italy and Spain. The dollar has suddenly looked good compared to the Euro, but this could change very rapidly once a resolution of the EU crisis is in sight, and once it does the uptrend could reverse very rapidly. The one thing that could save the dollar and drive it even higher will be if another deflationary downwave kicks in, which is what many wavers are expecting.

The 6-month gold chart actually looks positive and suggests that the dollar is likely to break down soon. Gold broke out of a bullish Falling Wedge pattern in mid-February and then reacted back to test support above the top boundary of the Wedge, after which it has meandered sideways awaiting a clear direction from the dollar. Should the dollar stage another upleg then gold is likely to break below the upper support level shown and drop to the key support level at the apex of the Wedge, which must hold to prevent a potentially much more serious decline. Should the dollar break down soon, signalling an end to its recent rally, it will mean that its recent ascent was an A-B-C bear market rally, and in this event gold should take off strongly higher.

An important point that we should always bear in mind in considering the price of gold against individual currencies is that as gold is "real money", as distinct from the intrinsically worthless trash that all fiat currencies in reality are, only kept aloft as they are by the maintenance of collective confidence, the "value" of gold in fiat is in a sense irrelevant. This has never been more so than now when most fiat currencies are engaged in a "race to the bottom" - to see which ones can become worthless ahead of the others. This is the reason why gold remains in a major long-term uptrend against most currencies, and it is also the reason why investors, particularly those with substantial net worth and the concomitant flexibility that such an enviable position confers, should make sure they have a significant proportion of their assets in gold bullion, before even thinking about silver, and much less other commodities such as copper and oil or wacko things like rare earths. A key point to make here is that even in the worst case scenario that the wavers write about, another deflationary downwave, gold may drop in nominal value, but since it is falling a lot less fast than other assets, it therefore buys more of them and is thus actually gaining in value. This is what happened in 2008 when although gold fell, it held up well in comparison with many other assets which plunged spectacularly.

We will end with a look at gold in Japanese Yen, as it is important to keep an eye on its performance in other currencies, especially as over a longer time horizon the dollar is likely to become increasingly worthless and irrelevant, as power continues to shift in the direction of Asia. As we can see on the 6-month chart for gold in Japanese Yen, it DID NOT break out in February against this currency. That said, however, it is in position to do so soon, with the early February bull hammer marking the probable bottom of the downtrend, as it did on the dollar chart, and price and moving averages in increasingly bullish alignment.

Posted at 8.20 am EST on 16th March 10.