Gold’s slippage in recent weeks has closely mirrored the U.S. dollar’s rise. For bullion bulls, the good news is that the dollar is rallying not for fundamental reasons that might persist indefinitely, but because of short-covering by carry-traders who effectively went short against the dollar. Mostly, they borrowed greenbacks in size in order to plow them into something else offering either higher yields, greater leverage, or both. That’s what happens when the Fed artificially lowers interest rates: financial speculators, including most of the biggest banks, borrow all the dollars they could conceivably wish for, practically for nothing. The big losers are pensioners and other savers, who effectively supply the dollars at the going rate – currently close to zero — fixed by the Federal Reserve.
Lately, however, the dollar has been rising, putting pressure on the carry-traders to repay their loans in an appreciating currency. The result is a short-squeeze that has pushed the dollar relentlessly higher for nearly three weeks with nary a correction on the daily chart (see above). The rally is just a minor, bear-market blip when viewed on the weekly chart. However, under the magnifying glass of a dollar-obsessed financial world, the rally is being hailed as the beginning of a major upturn in the dollar. We disagree. The dollar is intrinsically worthless, and merely comparing it to other currencies that are almost as worthless is no argument for a long-term bull market. Only a comparison to gold is valid, and in that respect, the dollar, euro, yen and British pound can only fall over time. Remember, no matter how strong the dollar looks right now, it’s only a mirage. It could persist for quite a while – for several months, even — but ultimately, all short-squeeze rallies can only end in collapse.
A Launching Pad
So where does that leave gold? Our current forecast calls for a correction down to at least $1028, basis the Comex February contract. That’s $59 beneath Tuesday’s settlement price of $1087. We began Monday looking for support near $1090 to hold, since that is not only very close to two “Hidden Pivot” supports, but squarely on a long-term trendline. By day’s end, However, February Gold had smashed the support, trading as low as 1075.20 intraday. The breach was sufficient for us to infer that the correction has further to go. Even so, we don’t like to chisel such expectations in stone. And that’s why we’ll be watching closely to see whether the February contract takes a bounce from 1059.80. That’s a minor Hidden Pivot, as far as it goes, but not so minor that it should fail to provide discernible (and presumably tradable) support. If the pivot gives way easily, though, we wouldn’t touch gold until it comes down to at least 1028. That’s not a Hidden Pivot, incidentally, but it’s significant nonetheless for having provided the launching pad from which gold went ballistic in late October.
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Terry S 10.08.09 at 12:19 am
” When I look back on all the crap I learned in High School, it’s a wonder I can think at all. Although my lack of education hasn’t hurt me none, I can read the writing on the Wall.” – Paul Simon
When I look back on all the crap I’ve read on websites… (’second verse, same as the first.’ – Herman’s Hermits)
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You ought to try focusing on just the good stuff, Terry. RA