Precious Metals and the Dollar
March 4,
2010
Keep on sowing your seed, for
you never know which will grow -- perhaps it all will.
Albert Einstein,1879-1955, German-born American Physicist
The
dollar has rallied very strongly easily taking out the lower
end of the targets we projected several months ago. It
almost closed above 81 on a monthly basis. Had it done this,
it would have made the outlook even more bullish. The dollar
has gone on to put in series of new 9 month highs and thus
by contrast one would have expected Gold and the other
precious metals to do the opposite. However, this has not
taken place.
If we
look at the chart of Gold, we see that while Gold went to
put in a 9 month new high, Gold did not even put in a 4
month low. This is a very strong development and suggests
that there is a very good chance that Gold could rally to
the 1170-1200 range before pulling back. On the longer time
frames, Gold flashed several strong intra market negative
divergence signals; the most important two are mentioned
below. .
The most
impressive metal, however, is Palladium. The massive rally
in the dollar has had almost no impact on the price of
Palladium; it is still trading very close to its highs. If
the precious metal's sector continues to hold up like this,
one can expect it to literally explode upwards once the
dollar rally fizzles out. From late 2008 to early 2009,
when no one was paying attention to Palladium, we were
strongly pounding the table on it. Palladium turned out to
be the top performing precious metal last year and is still
holding up a lot better than the rest.
Silver
has taken the most severe beating so far and this breakdown
could be (key word is could) providing an early warning
signal.
Silver’s
inability to trade past its 2008 highs strongly suggests
that all is not well in the precious metal's sector,
especially the gold sector.
On the
longer time frames Gold has flashed many strong negative
divergence signals the strongest of which were
1)
The dollar
putting in a higher low instead of a lower low when Gold
went on to put in a series of new highs
2)
The inability
of the GDX, XAU, and HUI to trade to new highs when gold
bullion surged to new highs
The potential for Gold
(precious metals) to remain in a prolonged consolidative
phase is still rather significant. The longer Gold trades
sideways the more explosive the subsequent rally is going to
be. However, there is the possibility that Gold could still
mount a rather sharp correction if and when the Dollar
surges past the 82 price point level.
A possible early warning of a
longer correction/consolidation in the precious metal's
sector will be given if the dollar can close above 81 on a
monthly basis, or it can trade above 84 for 3 days in a
row.
So far we have laid out the
technical perspective for short to intermediate term rally
in the dollar; our initial targets have already been
fulfilled. It’s time to provide some fundamental reasons as
to why the dollar is in trouble long term and why the
precious metals sector and the commodities sector stands to
benefit from these dollar woes.
1)
The US has a
massive current account deficit and it only seems to be
getting bigger. The economist’s plays with numbers by
stating that one month is less than the other and so forth,
but the trend is up. It now comes close to 6% of our total
economic activity.
2)
The US needs to
attract a whopping 1.8 billion dollars a day to compensate
for the current account gap. This trend is simply
unsustainable.
3)
While
Government officials talk big of a strong dollar policy,
they actually favour a weak dollar. This serves two
purposes, it helps increase exports and it allows the
government to pay its debt with lower valued dollars. As
long as the Government continues to borrow at these mind
boggling rates, it is going to unofficially favour a weak
dollar.
4)
By inflating
the money supply the government is imposing a nefarious
silent killer tax on the masses. The only way to hedge
against this outright theft is to hedge yourself by getting
into hard assets (precious metals, lumber, oil, etc).
5)
Our national
debt is 12.4 trillion an increasing. However, this does not
take into consideration all our unfunded liabilities such as
social security and Medicare. If these are combined the Debt
levels soar to well unimaginable levels.
6)
44 states are
facing budget shortfalls. California is leading the way as
it is expected to spend 50% more than it will generate this
year. Now that is a really scary thought. Since 2007 US
states have collectively spent 300 billion more than they
have generated. These deficits means higher taxes and so
far 33 states raised taxes but collections have plummeted to
their worst levels in 46 years; you cannot squeeze water out
of a rock. No jobs, means no revenues but states are
selling new bonds at a record rate to raise funds; a recipe
for a long term disaster.
7)
Eventually the
Feds are going to have to raise rates to continue attracting
the huge amounts of money it needs to function. Overseas
investors are going to start demanding higher rates. Higher
rates will kill this fragile economy. Precious metals thrive
in a high interest rate environment. From a long term
perspective the bull market has only just begun.
Conclusion
The
dollar has exhibited unusual strength; it simply refuses to
correct, refusing to trade below 80 for any decent period of
time. A close above 81 on a monthly basis will be the
strongest signal that it could potentially trade to and past
90 before topping out. In the short term time frames, the
Dollar is overbought and normally one would expect a
pullback from current prices to roughly the 78 ranges. Gold,
on the other hand is also picking up strength; this is
clearly illustrated by its refusal to match the dollar by
putting in a new 9 month low, instead it has gone on to put
in a higher low.
On the
longer time frames though Gold has still flashed several
very strong negative divergence signals that need to be
neutralized; two of these negative divergences were
mentioned above. Thus the potential for Gold to
correct/consolidate for several more months remains high,
until off course the above signals are neutralized or a new
buy signal is issued on the weekly time lines.
Right
now Gold is holding up remarkably well In the face of a
stronger dollar. If this pattern continues, then the next
break out is going to be very explosive in nature; the
dollar is not expected to mount a long term rally. Our long
term outlook for the dollar is that it’s going to put in a
series of new all time lows in the next 12-24 months.
From a
long term perspective, all strong pull backs should be
viewed as buying opportunities.
There are two ways of exerting
one's strength; one is pushing down, the other is pulling
up.
Booker T. Washington, 1856-1915, American Black Leader and
Educator
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