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« Agnico-Eagle Mines Call Options: Re-visited! | Main | Its 2012 and Gold rockets past $5000! »
Wednesday
Oct012008

The USD: Can it continue to rally?

USD Chart 01oct08



As we can see from the above chart the US Dollar has rebounded once again to challenge its resistance level of '80'. Congress could approve the revised bail out plan in the next day or so, which may be enough to push the USD higher. Should it break through this resistance level in a significant fashion then this resistance level will become a support level as it was in the past. Gold could then suffer a knock effect from a strengthening dollar. Also note that the 50dma is moving up adding support and the 200dma has levelled off, for now.

It goes without saying that the vote regarding the financial bail out is the most important single factor effecting gold at the moment. Another ‘NO’ vote will no doubt hit the equity markets and the dollar and gold could be perceived as the place to hide. However it appears inevitable that a rescue package in some form or other will get a ‘YES’ vote shortly. Will this move be the saviour for the financial system? We think not! It will have a short-term ‘feel good’ effect, but as we have said before it is akin to giving a drunk another drink. This injection of cash will be absorbed with rapidity and then we where are we? Still paddling up a waterfall of insolvency. The situation has not changed, as the same people still cannot finance their debts, a stay of execution is all that will be achieved.

How does this issue affect gold bugs? Well, for starters it will be volatile over the next week or so, but gradually more and more investors will recognise that this market sector is the place to be.

The return on cash when considering inflation is negative so that looks like a slow death to us. The mainstream stock markets are way over valued, in our humble opinion, that’s why we don’t have a bean invested in them. The DOW and mainstream markets will continue to drop significantly and when we feel this has passed, maybe then we will take an interest in other market sectors.

We are holding tight to what we have and are looking to deploy the remainder of our ‘opportunity’ cash on any dip that may present itself.

Have a good one.

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Reader Comments (9)

Earlier this year Warren Buffett said that stocks have been overperforming for years and now would experience a 'reversion to the mean' resulting in much lower returns in the coming years. He also has been predicting higher inflation and a lower dollar. We'll see if he's right (again).

October 2, 2008 | Unregistered CommenterSidj

The $USD Chart above looks like a inverted teacup and handle, or the formation of a new head and shoulder pattern. Since that is all I know about this stuff, I have to ask if you see a possible projection here of extended dollar upside vs a short blip.
Thank you.

John

October 2, 2008 | Unregistered CommenterJohn Ell

Barrick and Yamana Gold look screaming buys at these levels,
When the market comes to its senses it will realise these stocks among others are priced at ridiculously low levels
and when the rebound comes it will be fierce and rewarding
to all those that refuse to succumb to selling.

October 2, 2008 | Unregistered CommenterRich

Things don't look great for gold/silver. Inspite of many commentators trying to persuade themselves and their readers that all is well, the spike in gold in the US920's on Monday was nowhere near the previous high (on the Bear Stearns collapse). Things have gotten a lot worse since then, but gold has failed to do what it should have done. In addition, stocks such as Hecla(featured in Silver Prices today )have fallen dramatically because they have recently increased their exposure by buying other companies/joint ventures and have therefore fallen twice as fast. I'm a long term bull, but there is an obvious need to be flexible by taking profits and cutting losses when necessary.

October 2, 2008 | Unregistered CommenterMike Wortley- UK

I too am looking to deploy the remainder of my ‘opportunity’ cash.

October 2, 2008 | Unregistered CommenterBC

Rich, why would these mining stocks look like a screaming buy right now? They've been plunging along with the rest of the stock market. Industrial demand for metals is drying up as the world economy sinks. I think this global meltdown that will affect nearly everything.

October 2, 2008 | Unregistered CommenterPaul

My working thesis is as follows:
Inflation= money supply and credit availability/creation (seen the past approx. 15 years).
There is going to be a massive decrease in the credit part which more than compensates for the current or near future increase in the money supply. This credit contraction is like a massive black hole that is going to suck in all these printed dollars. Therefore we are going through a deflationary period which will be bad for gold. Also, the commodity index traders are massively liquidity their index holdings in commodities after seeing they do not provide a negative correlation to the markets. The hedge funds are also going to need to liquidate alot of holdings this next quarter for a surge in redemptions.
Eventually (2-3yrs ?) this credit deflation will be complete and then you will have the return of inflation from the printing of worthless dollars and the rise of gold once again.
Am I wrong?

October 2, 2008 | Unregistered Commenterchris

Chris, good post. I believe I agree with you on that one. I believe that after the devastating deflationary period is over, we will see massive hyperinflation. All that liquidity the government has recently provided will eventually work it's way to destroy the currency. Probably in a couple years.

October 3, 2008 | Unregistered CommenterPaul

Sidj,

We too see higher inflation and a weak dollar, but only time will tell!

John,

If the USD breaks up through the key level of 80, we see it running to 82 or so. However, it is currently resting right on 80 and therefore we have yet to see a significant break up through that level. It could be the case that we see a double top at 80 before the USD falls back towards 76, but we are waiting for confirmation that the USD has or has not been able to breach the 80 resistance.
So we see the USD upside as limited to 80 or 82, with the downside coming now or in a few weeks as the USD falls to 76.

Rich,

Agreed. BUY GOLD!

Mike Wortley,

The reason gold is that high is because investors have been dumping stocks for cash, causing a run into the USD. In time, gold will rise. In August last year gold and gold stocks were dumped during the credit crunch and it took some weeks for investors to realise that gold was the safe haven they needed to be in. When they realised this, gold went from $660 to $1030.
We agree that flexibility is essential, as it profit taking. On the recent spike in gold prices we took 100% profits on our gold call options and calls we have on AEM.
http://www.gold-prices.biz/gold-call-options-sold-for-100-profit-in-44-days/
http://www.gold-prices.biz/aem-call-options-sold-for-100-profit-in-36-days/

BC,

Any ideas where you are going to deploy it? We our currently revising our strategy.

Paul,

One must remember that gold is not an industrial metal, nor a commodity, it is a currency and the best one to be invested in right now in our opinion.

Chris,

Very good argument Chris, a high quality comment. However we think that the central banks will stop at nothing to avoid deflation, so we think that the current and future massive increases in the money supply, will lead to inflation.

Paul,

Agreed with you there, but we think inflation will come faster than you think.
We would like to thank you all for your great comments. We appreciate the high quality debate and the varied point of view, that’s what this site is for after all!

October 3, 2008 | Unregistered CommenterGold Prices

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