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"I know that most men, including those at ease with problems of the greatest complexity, can seldom accept the simplest and most obvious truth if it be such as would oblige them to admit the falsity of conclusions which they have proudly taught to others, and which they have woven, thread by thread, into the fabrics of their life."
--- Leo Tolstoy
Lately we’ve had a lot of rhetoric about dollar strength, and by implication the end of the bull market for gold. I would like to discuss both in today’s report and share some of my insights for the future. The US dollar has been the world’s reserve currency for seven decades and is recognized in even the tiniest corner known of the world. Gold on the other hand has long been forgotten in the Americas, even looked down upon, while Europe is neutral on the yellow metal at best. Only the Middle East and China recognize gold as a real store of value in today’s world. The problem with fiat currency, paper money backed by nothing but a promise to pay, is that governments always succumb to the pressure of printing their way out of trouble. History shows us that no fiat currency has ever stood the test of time. There are no exceptions. Now take a look at the following chart of the US monetary base:
You can clearly see that the Fed has never withdrawn liquidity from the system and, as of late, is expanding the money supply almost exponentially. Now the Fed is proposing something that it hasn’t done in thirty years, i.e. the removal of liquidity from the system, and yet supply is going off the charts. Then stop to consider that I have seen good reports that claim the Fed has grossly underreported the money supply and the real amount is just shy of US $3 trillion!
If the US was acting alone in this unprecedented expansion of the monetary base that would be one thing, but almost every major country is expanding their respective money supplies at double digit rates, and has been for some time. That’s why gold has been rallying in every major currency as you can see in the following chart:
Gold has averaged a double digit gain in all major currencies for the last decade, and that is the world’s best kept secret! It’s no accident that the largest gains are in the US Dollar and British Pound since they are the ones who abuse the printing press the most.
When one looks at the worldwide move to the yellow metal, it is difficult to understand how anyone with any intelligence could think that the dollar is about to embark on a new bull market. A look at the ten year weekly chart shows and almost continuous decline from the 2001 high, and with one exception all reactions were mild. The current reaction is also mild by all previous standards and is now running up against good resistance at 81.36. Also, you can see that yesterday’s close was right up against the 200-wma. Take a look below:
We saw an initial reaction that took the dollar from 70.70 to 89.62 followed by a decline to 74.23, and now another reaction to today’s current price of 80.85. I would be very surprised if this turns out to be anything other than a lower high, maybe as high as 82.41, and then we’ll begin the next leg to a lower low. Given the first chart I posted, you can’t hope for much more than that.
Gold’s ten year weekly chart is just the opposite of the dollar with the bear market coming to an end in 2000 and a bull market that continues as I type. So far gold has rallied from US $252 to the current price of US $1,126.70 but it has been subject to stronger reactions than the US dollar. Take a look below:
Currently gold is moving sideways between support at 1,090.60 and resistance at 1,136.70 and I now view this as accumulation in preparation for a strong move higher. This move will take gold up to the October all-time high and should propel it to a minimum of 1,298.10 and maybe even to 1,372.80. I should mention that the rise in gold is taking longer than I projected due to the increased deflationary pressures and that makes it difficult to calculate time frames.
My optimism for gold, and inversely my pessimism with respect to the US dollar, is well supported by the following Point & Figure charts. First gold:
and now the US dollar:
You can see that gold has an extremely bullish price target of US $1,300 while the US Dollar Index has a very bearish price target of 63.00. I believe you’ll see both by late summer (in the US).
Finally, many of you are concerned about your gold stocks but with gold’s
apparent decoupling from the US dollar, we’ve seen good strength in the HUI over the last week or so as it holds above strong support at 378.56 and yesterday moved above decent support at 398.58. For those of you who had the stomach and patience to sit through all of the recent turmoil, it appears to me that you will soon be rewarded. Finally, take a look at the Point & Figure chart for the HUI:
You can see the bullish price target of 496.00 and I would not be surprised to see that exceeded this summer. Currently the HUI rests at 421.29 looks like it will test resistance at 427.32. Gold, silver, and the gold stocks all appear to be shaking off the effects of deflation and are decoupling from the dollar. If that’s the case, this will be the start of a large move to the upside, so I would just sit tight and enjoy the ride.
Steve Betts
Stock Market Barometer SA
March 02, 2010
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Steve Betts has been involved in the futures market now for over twenty years.
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