Chart courtesy of Stockcharts.
We can see from the above chart that the inverse correlation between gold and the US Dollar have more or less remained in place through out the year. We can also see that gold could be forming a bottom and the US Dollar could be forming a top if we look at the their behaviour over the last three or four weeks.
The dollar is being supported by the flight to cash as the unwinding of margin calls continues to force investors to sell most of their stocks regardless of quality. As these actions have almost run their course and the holding of the dollar represents a negative return we anticipate that the dollar will soon resume its trek south. We are not saying that this is a buying opportunity as there are just too many unknown variables at the moment. However, we do need to watch this correlation as it is very volatile and when the change comes gold will move up quickly, hopefully dragging the gold producing stocks with it. The alternative investment for these holders of cash is to invest in other currencies when they see the dollar start to slide. However, foreign governments are also slashing rates in order to stimulate their own economies. Only yesterday the British Government slashed the base rate by 150 basis points, a dramatic move for the Bank of England. One gets the impression that things must be a lot worse than we imagined and that the powers that be at the bank are extremely worried about what’s on the horizon. The rate for the Euro was also slashed so we are rapidly running out of places to park cash that does not offer a negative return.
We are not buying anything at the moment but we may make a short term move on a silver stock next week, when we have done some more work, risking only a small amount of cash at this point.
Have a good one.
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