Charts courtesy of StockCharts.com.
As we can see from the above chart the US Dollar has fallen in dramatic fashion from a high of 88 to close today at 78.52 registering a fall of 10.77% in less than a month. This is something we have suggested would happen despite all the dollar bulls proffering a sustained rally in the US Dollar.
So lets recap:
14 December 2008 - US Dollar Rally Falters: Good for Gold
(click to enlarge)
The large rally in the US dollar is now faltering, after we indicated that the greenback was running out of steam. As the chart above shows, the USD has broken down from its short term trading range and now looks likely to retreat towards its long-term support level of 80.
09 December 2008 – Gold Stocks On the Move
Massive spending plans, the creation of more and more paper money may well achieve the target of proving stimulus to the world economy. However to create more money is to inflate the money supply bringing with it inflation. To use Webb’s definition of Inflation:
“The rise in price of goods and services, or Consumer Price Index (CPI), when too much money chases too few goods on the market.”
02 December 2008 – US Dollar Rally Losing Momentum
As the chart below shows, the US dollar has enjoyed a terrific rally in recent months, rising from 72 to 88 on its index. This has been the result of, not so much a flow into the dollar, but a flow out of most other currencies, and the unwinding of large leveraged USD short positions together with the unwinding of stock positions bought on margin.
28 November 2008 - Bought Yamana Call Options
Our expectation is that the US Dollar is coming to the end of its rally and will fall as quickly as it went up, if not quicker. The price of oil is also looking like it has been oversold recently and it too could stabilise and then head north. Paper money is being manufactured out of thin air bringing with it inflation, albeit with a lag time, but that’s our view.
21 November 2008 - Comex: Has it got the Gold?
Note that the US Dollars upward progress is beginning to slow and also note the gap that has opened up between the dollar and its 200-day moving average. This can’t go forever and we expect to see the dollar return to its 200-day moving average before too long. As and when that happens there will be spikes in gold prices
The above selection of charts more or less captures our thoughts and research as the decline in the value of US Dollar has unfolded right in front of our eyes. The next test comes when the US Dollar takes tea with its 200 day moving average, which is presently sitting at 77. We may experience a slight bounce at this juncture of the dead cat variety, as we just cannot think of one redeeming feature for the once almighty dollar.
Based on our conviction that the US Dollar would u-turn and head south and that gold would react inversely to the dollar we decided to act on it by implementing the following trade:
We went out and bought the JAN 2009 Call Options on Yamana Gold Incorporated at a strike price of $5.00 for an average price of $1.04 per contract. These contracts closed at $2.00 today registering a gain approximately 100% since the 28th November 2008.
The question now is when to take profits, the market has been kind to us on this trade, however the gold bull is once again in the ascendancy – a difficult one so watch this space!
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