Gold vs. The Dollar: The Tug Of War...
Yesterday gold was up strong in overnight trading,
only to get smacked down into the New York open.
Same thing this morning, another smackdown...
And yesterday PM stocks opened positive, only to sell off hard,
but on light volume -- with very few pm stocks hitting their
average daily trading volume.
And that was the key takeaway - light volume.
Many funds have rolled up shop for the holidays and
have only junior traders in maintenance and monitoring
mode on duty. And this allows anyone, well, not just
anyone, someone (WWJPD?) to push the gold sector around
if not at will, without much effort.
Both yesterday and today's positive open for gold & silver
stocks shows that buyers are present, but they're nibbling.
What's lacking is volume.
And we all know that the 800 lbs. Gorilla in the gold sector
(John Paulson), is launching a new gold stock fund in January.
I'm betting that our "volume" problem will be cured with that launch.
Also, let's not forget who joined Paulson's firm shortly
before his major move to gold...
And the other firm that Greenspan is a paid consultant to,
PIMCO, just dumped bonds and ran to cash...
bloomberg.com
Dec. 18 (Bloomberg) -- "Bill Gross, who runs the world’s
biggest bond fund, cut government debt holdings and boosted
cash to the most since Lehman Brothers Holdings Inc. collapsed
in 2008 amid increasing speculation that interest rates will rise."
Suffice to say, someone knows something.
The HUI Gold Bug's Index is really fighting to hold a key
technical support level here. I'd be very impressed if the
HUI can close positive, with the dollar up and gold down today.
Technically, while we're at what could be a deeply over-sold
buying opportunity, and while we're seeing buyers really
fight to hold ground here, the one caveat that both tempers
my enthusiasm, and determines what type of re-entry
trade I put on, is this chart of the U.S. Dollar.
Both gold and gold stocks need for the US Dollar to break
it's uptrend before this rally in gold can resume to any
significant degree.
The sharp reversal in the dollar was indicative of short
covering from shaking out the carry trade, but was generated
not on fundamental economic, or fiscal strength in the US,
but rather from weakness in the Euro due to European debt
default concerns, and Japanese Yen intervention by the BOJ.
Until the U.S. Dollar breaks below it's current bullish uptrend,
I only want to sell deep out of the money puts (HUI 330ish levels),
and then use a portion of those large premiums to buy some
upside leverage via "calls" in the strong March to April (2010)
seasonal period.
Because any further sell off in gold shares will break
the technical uptrend for the HUI Index, I would wait for
either the US dollar to break it's bull trend, or for a
really compelling buying opportunity in the HUI:Gold ratio
before buying back shares and re-establishing a full position
in the sector.
Gold rallied from $905 to $1226 on this move, and a 50% textbook
re-tracement of the move would take us to $1066 gold,
with the old resistance of $1000 gold, perhaps tested as
new support.
For months I’ve been pounding the table on the CBO numbers, as
I firmly believe that America’s debt, deficits, and unfunded
liabilities are now so large, that they can never be met by
ANY combination of growth and taxes, which leaves America
with only two choices...
Default on the debt, or devalue the dollar.
And for those who think a Fed rate hike spells the end
of the gold rally - think again.
Remember that gold rallied directly into 425 bps of Fed
rate hikes from June 2004 through May 2006.
If the correction in gold continues we could see a very
compelling buying opportunity in gold shares at the HUI 377,
or even the HUI 336 levels. So leave some powder dry in order
to be able to take advantage of those valuation levels, should
this dollar rally continue.
But don't be afraid of selling some puts, and buying some
calls in anticipation of John Paulson's January fund launch,
and the long term underlying fundamentals driving gold,and
the U.S. Dollar returning to equilibrium.
This tug of war between gold and the dollar will be resolved
shortly, because in a couple of weeks, there's going to be a
"ringer" digging in, and grabbing onto the gold end of the rope.
SOTB |
