However we have called the area below 80 on the US dollar index as “The Abyss” and now that the dollar has fallen into this abyss, why should it rally at all?
After 80 there is no technical support as the 80 level has not been breached for years, and so there is no real number on the index that we can see providing support. Therefore we have to ask the question why should the US dollar rally, or even stop falling at all. There are a few factors that could spur a temporary rally in the dollar. These include the efforts of the Plunge Protection Team, the Federal Reserve and investors which may view the dollar as being at a discount at the moment.
Firstly, we think the main aim of the PPT is to prevent a “plunge” in the US economy and stock market, not the fall in the value of the dollar. Therefore they will save the US economy first and the US dollar second. We believe that the PPT will be quite happy to sacrifice the US dollar, if the think it will save the American economy. Therefore we don't see the PPT buying up the dollar to prevent it falling further.
Secondly, the Fed will also prioritise the US economy over the USD. Bernanke has cut interest rates twice to help the stock market and in particular the terminally ill US real estate market. Bernanke will continue to cut interest rates, so long as he thinks that is the best thing to do to put off economic turmoil in the USA. However, if cutting rates too much results in inflation then the Fed may have to take a pause from cutting rates to stop inflation damaging the economy. By simply taking a pause from cutting rates, let alone raising them, the Fed could spark a small rally in the dollar, which would have the obvious negative knock on effect towards gold prices.
Thirdly we have the trading and investment community in general, which could view the USD as “at a discount” and therefore begin buying dollars in anticipation of a rally.
The situation in the markets at the moment is not “textbook” though. In our opinion, we are entering turbulent times with a real estate crash coming to the USA and other western countries such as Britain. We are also bearish on the stock market, with the exception of certain commodities, and we see a severe recession coming, perhaps even a depression to rival the 1930's. Therefore the “textbook” trading strategies that usually work 90% of the time, are not necessarily going to work for the next few years as we are entering a financial climate that has only occurred a few times in the last century. In other words it may be a case of “all bets are off” as the markets move deeper into financial turmoil. The only real “safe bet” we can see is gold, silver and the associated precious metal stocks.
Therefore the best way to protect yourself from what is coming is to invest in precious metals. The summer was indeed a fantastic buying opportunity and in our newsletter we said gold stocks were a “screaming buy” on August 20th when the HUI was trading just above 300. We always practice what we preach and therefore loaded up on gold stocks and silver stocks throughout the summer, especially in late August knowing that things would get going after Labor Day, which they did.
We did take profits about a month ago and said that we were not going to be buying for the time being. The gold market and gold stocks are still a tad too overbought for us at the moment so we will patiently wait for the next correction or pullback before adding to our positions. We have by no means sold up and gone completely onto the sidelines, it was just a case that we had bought rather heavily over the summer and were up to our ears in gold and silver stocks. Therefore we reduced our positions slightly and took some great profits (in some cases 50% gains in little over a month) off the table until we were only “up to our armpits” in precious metals.
Make no mistake, gold is still going to $1000 sooner than you think, and in a few years we think that figure will be around $3000 which is obviously going to blow gold stocks through the roof. This rally that could come in the dollar is not as important as the long term big picture for precious metals which is very, very bullish.
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