Dollar and Euro

In March I wrote:

The dollar spent the last two years between 81 and 92. I don’t see any change from this up and down pattern for the next two years. I am dollar bearish, just not against the currencies which the dollar index is measured against.

The lenient reaction by the Fed towards subprime mortgage problem, coupled with talk of further Chinese currency revaluation accelerated the dollar’s downtrend. I believe we are within 2% of the dollar’s bottom. A year long rebound could be in the cards after the low is reached. This also means the dollar index and gold could both rise in tandem later in the year.

The Euro is approaching all time high. We doubt the 1.38 level will be breached.

Gold and Silver:

In the March update, I wrote:

Gold had a false breakout in February. However both gold and silver retested solid support at their 200 DMAs. The Asian gold market has been very strong, partially due to the increasing purchasing power from their strong currency….Last time I remembered having seeing urgency by Asian gold traders to buy was in November of 2005 when gold broke through key resistance of $450 and raced to $730 in six short months.

The important $650 resistance level for gold has now been breached and I don’t think gold will look back. We could reach $720 by end of May, which will spell the start of a new and possibly most spectacular phase for gold to date.

XAU

In March we wrote

The XAU over Gold ratio again tells us the current sentiment for gold stocks is at an extreme low and that we are likely right at the bottom for gold and gold stocks at this time.

Typically, third time is the charm for trying to overcome a resistance. XAU has been trying for the 150 resistance multiple times and we believe this level will be taken out by end of May. The XAU over Gold ratio also showed a rebound, telling us that the bottom for both gold and gold stocks is firmly in place.

Equity Markets:

The Shanghai market has tripled since early 2006. This should really put global equity bears on notice. I expect similar price action to eventually happen across the world from Asia to Africa as smart global fund managers put money to work. This can also be seen as part of the wealth re-distribution.

S&P 500:

In March we wrote:

Equity bears don’t get too excited, the chart says the uptrend for the S&P500 will remain intact.

Indeed, the S&P 500 rebounded. It shows that relatively speaking, the S&P 500 is undervalued relative to the currency unit it is measured in. i.e. the dollar.

CRB and Oil:

We wrote in March

As expected, Oil and the CRB both rebounded up to their 200 DMAs and then failed. We see a narrow trading range for oil, with the downside from here being minimal.  Any upside at this time will be capped at the 200 DMA.

Oil and CRB took out their 200 DMAs, and we could very well be wrong with our analysis. We won’t know for another week for two if the oil rebound continues. In any case $50 oil looks to be the bottom and oil stocks are on the rebound and many are selling at bargain prices.

Conclusion:

We wrote in March

If gold clears the $650 hurdle this week, I would be very surprised if gold doesn’t try for its all time high of $850 by September. As opposed to last summer, this summer will be anything but dull for the yellow metal investors.

We also wrote last November titled Seasonality Shift

http://www.kitco.com/ind/Lee/nov72006.html

The market has a way of setting investors off balance. If 2007 is the year that gold makes an intermediary top, we suspect the market will spoil those investors that follow conventional seasonality.

And let me finish this update by quoting the November conclusion

Historically, the gold market has followed a strong seasonal cycle.  The old adage traders live by is “sell in May and walk away, buy in September and harvest by spring.” The lack of positive gold market action in September has caught many by surprise. Is this the end of the gold run or merely a slight delay before the bull resumes?

As we outlined, the XAU over Gold ratio indicates gold is near the bottom, not the top. Fundamentally and technically, the dollar remains bearish. Moreover, the gold equities simply haven’t exhibited the type of action we call the “maniac blow off”; a select number of juniors remain exceptionally cheap with current metals prices taken into account.

This is not the first time during the bull run that a fall breakout has been delayed. In late 2002 the XAU traded between 60 to 80 from September to late May until it finally broke out in April. When the breakout finally occurred it was astounding.  The XAU rose 70% going from 65 to over 110 in 6 short months. If XAU were to follow the same suit this time, we would now expect it to consolidate between 120 and 170, eventually taking out 170 around next April on its way towards 300, again defying those who choose to sell in May, and walk away.

John Lee,
CFA john@maucapital.com

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