Dollar bounce:
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"As it may be my boldest call in my nearly decade long writing contributions in this business, we are about to witness one of the most significant currency interventions in history. "
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MoundReport.com Presents Our Featured Article:
Gold’s Next Big Move
By JMTG’s Head Analyst James Mound
November 26th, 2004
In what is perhaps the most boisterous and significant breakout in gold in almost two decades, we are running dead smack into a mega move of historical proportions. To many, gold & silver are in the baby stages of perhaps the biggest bull run of all time. They find fundamental support in a weakening dollar and general shortage of physical gold and silver. They find technical support on a monthly chart with one of the most impressive saucer formations anyone has ever seen, and they find momentum in increasing volume during breakouts to new highs and expanding volatility. What they don’t find is the justification for why the next big move in gold and silver is down. So, if you’re one of them (or even if you are not), then this is a must read.
So feel free to ask why is this the end of the bull run in gold and silver? Simple. As it may be my boldest call in my nearly decade long writing contributions in this business, we are about to witness one of the most significant currency interventions in history. Let me tell you why.
Gold, Silver and the US Dollar
Despite recent price action in inflation feared oil, the gold and silver markets are generally directly connected to dollar through an inverse (opposite) correlation. Therefore it should come as little surprise that the next major shift in metals will be due to a major reversal in the US dollar.
Mr. Rubin and 1995
Back in 1995 our care free Mr. Rubin declared a strong dollar policy that led to a massive 50% plus run up in the US dollar that lasted about 7 years. This was no minor event. First, it illustrated the power of the US to dictate global currency shifts. Second, it said in very big letters: what the US wants the US gets. Last, but not least, it stood the test of time, showing the staying power of our economic policy. Now, in perhaps the most dramatic reversal in global history, the US dollar has retraced almost all of that 7 year move in under 3 years! President Bush has proven once again that what the US wants the US gets, and in this particular case it got it hard and fast. The mega retracement, however, puts us right back where we do not want to be, and perhaps is the first sign that the US economic policy is no longer in control (albeit quite possibly by their own design) of the downside pressure in the dollar. It is time for a repeat of 1995 to get us back in the driver’s seat.
The Biggest Difference Between 1995 and 2004
There are a number of differences between the fundamental structure of global economics in 1995 and today. The main focus, however, should be on the creation of the Euro and its dramatic growth and inverse correlation to the dollar. Once a divided currency that lacked power, the European Union and its make-up now have a substantial and established roll in global economic policy. The euro is where the dollar was 3 years ago and is facing some serious export issues that cannot continue. When I mentioned an intervention, I never said it would come from us, and all signs point to a euro currency intervention that might just create a face off with the dollar. Truth be told, I fail to see the continued benefits of a much weaker dollar and with growing concern over the global damage of a broken dollar in relation to exporting, a shift is not far away and may not necessarily be opposed by our government.
The Two Year Trend
Currencies have long been known for their tendency to trend in approximate two year cycles, most notable in currencies such as the Japanese Yen and British Pound. The US dollar, however, has established itself in what has been typically longer term trending cycles devouring the shorter term shifts. This would suggest that the dollar may have several years of downtrending left in it, but also lacks the momentum to follow through its current path for much longer. We just erased a 7 year trend in less than 3 years, and on both a technical and cyclical level we are overdue for a major retracement.
Technically Speaking
On a purely technical level, we are approaching historical lows at 8020 and 7840. Back in 1995, our strong dollar policy kicked in just before that 8020 mark. This is no minor support, and it would not surprise me if we never even test it. During the dollar’s three year breakdown we saw one bear flag after another, and the spikes thereafter failing to break above the lows of the previous break. This was a very strong surrender by the dollar and the turn will come when the there is no flag pattern and the prior lows are spiked through. This comes on fundamental shocks, something like a currency intervention. The way I see it you have two choices: 1) Play the anticipated support in the dollar by liquidating long gold and silver positions now, and by getting short in risk controlled ways or 2)Wait for confirmation of the bounce by getting out of a bear dollar on a break above 8490 (8500 to be sure). Either way, the dollar is in for a significant bounce to possibly par over the next year or so.
Call it bold, call it contrarian, call it what you want – I believe I will be calling it correct when we play hindsight in six months.
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