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Days Are Numbered for U.S. Dollar Bulls

Friday August 31, 2012 08:59

Editor's Note: Catch the latest addition to Kitco.com! Seasoned Metals Analyst, Kira McCaffrey Brecht will be sharing her extensive commodities knowledge on Kitco.com. Kira has been writing about the financial markets for over a decade -- posts during her career include Managing Editor for SFO magazine, Chicago Bureau Chief at Futures World News, Market Analyst at Bridge News and Technical Analyst for MMS International.

Brecht: Markets On the Move

August 31—Finally, after days of waiting, the famous Jackson Hole speech by U.S. Federal Reserve Chairman Ben Bernanke is just hours away. The speech slated for 10 a.m. ET Friday could be a non-event or it could turn markets on a dime.

Shorter-term players would be well advised to flatten out positions and step to the sidelines ahead of this potential game changer. But, most importantly any longer term dollar bulls out there are put on notice that a nail could soon be hammered into the coffin of the spring-early summer bull rally in the dollar.

Since late July, the U.S. dollar index has slid just over 3%. The U.S. dollar index is at a critical support point and its behavior over the next week will be crucial for gold. With a bevy of risk events on the calendar including Friday’s Jackson Hole speech, the Sept. 6 European Central Bank meeting and the Sept. 7 U.S. non-farm payrolls data release—there is plenty fodder for fireworks ahead.

The U.S. dollar could be forming a significant top on the daily chart, and that could help usher in a healthy fall rally in the gold market. There's plenty of fodder ahead that could trip up the dollar including a significant effort by the ECB to actually try to solve their problems—which could be announced as early as next week. If the ECB can get their house in order it would deflate the safe-haven buying that has artificially pumped up the U.S. dollar in the spring and early summer months.

The U.S. dollar wasn't rallying because U.S. fundamentals or structural fiscal policy looked strong, the greenback gained because it is the world's reserve currency and a safe place to park cash during risk aversion.

There is an old market saying —"the trend is your friend." Currently, the short-term trend is down for the U.S. dollar index and the short-term trend is up for gold. Here's some key levels to watch on charts. The U.S. dollar index has been sitting above and holding above critical support from the June 19 swing low at 81.18. The bears are just begging for some news to break that floor.

If the 81.18 floor breaks in the U.S. dollar index it will confirm an intermediate term multi-month top for the greenback—and that would be very bullish for gold, which is of course priced in dollars.

On the upside, short-term resistance lies at 81.82 for the U.S. dollar index and a solid rally above that ceiling would show the dollars bears have lost the battle right now.

Comex December gold futures have formed a potential bull pennant on the daily chart. But, to confirm a breakout on that pattern, a rally through the $1,679.30 level would be needed. Is that occurs, an upside pennant target shows potential to the $1,740 area per ounce in gold.

Dollar weakness below 81.18 could be the spark needed to trigger that pennant breakout in gold. If the U.S. dollar were to break that support, the greenback could be vulnerable to a retest of the February lows in the 78.00 region.

While short-term players may need to be nimble with their scalping opportunities Friday, longer-term players could see breaks of key levels that could confirm continuations of recent trends with bigger longer-term objectives ahead.

Trade the trends. Sometimes it is these big events like Jackson Hole or an ECB meeting that are needed to jumpstart new trends already in play.

By Kira Brecht, contributing to Kitco.com, follow her on Twitter @KiraBrecht

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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