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U.S. Dollar Breakout Means Gold Has a Lot Further to Fall

Commodities / Gold and Silver 2010 Dec 20, 2009 - 05:18 PM GMT

By: Clive_Maund

Commodities

Best Financial Markets Analysis ArticleGold behaved as predicted in last weekend’s update - it rallied into the middle of last week before plunging on Thursday and then ended the week with a modest upturn. Thursday’s plunge involved a sharp break below our important parabolic uptrend channel, and although the break was not by a decisive margin and gold rallied Friday, this sharp drop has bearish implications.


We can see this latest action on the 1-year chart on which we can also see that although gold has broken down from the parabolic uptrend, it has yet to breach the “last ditch” support of the lower boundary of the parallel uptrend channel, which is shown as a dotted line. Until that happens a significant bounce is possible particularly as it is now quite deeply oversold on a short-term basis, as is clear from its RSI indicator and stochastics and in the vicinity of its rising 50-day moving average.

In the situation of a continuing intermediate uptrend we are now at a classic “buy spot”, and even if, as we believe, the intermediate uptrend has now reversed, it would be quite normal for a bounce to occur here although in this case it will turn out to be a trap. If the lower boundary of the parallel uptrend channel shown is decisively breached it will be a signal to close out all long positions, as such a break will call for a initial drop to the strong support at the top of the 20-month trading range, which starts to come in at about $1030.

Some observers are comparing the current reaction to the mid-trend correction that occurred half way through the powerful uptrend of late 2007 and early 2008, that we can see on our 3-year chart, which took the form of a continuation Triangle, but there is an important difference, which is that the steep advance preceding the Triangle in 2007 did not blow out above the top of its channel, as occurred on the recent near vertical advance. The recent event was a blowoff top which normally marks the end of an advance.

Many “bugs” cling to the idea that gold is set to rocket because the cartel controlling the gold price is about to be smashed, and are deluding themselves that the recent powerful breakout by the dollar is just some blip or aberration.

That’s not the way it looks to us - this dollar breakout, which we predicted well in advance as demonstrated by the chart from the 29th November update which appears below, looks like the real deal, and the dynamics behind it are believed to be as follows…

Big overseas Treasury holders such China and Japan are believed to have “strong-armed” the US in the recent past behind the scenes and essentially said “You either quit undermining your currency and defrauding us with your zero interest rate policy or we are going to dump them, big time, and collapse the Treasury market.” The Treasury market is the “aorta” of the US, which involves swapping essentially worthless paper for the goods and services of countries that are dumb enough to buy them, thus allowing the US to live way beyond its means running continuous massive deficits. It is viewed by the administration as infinitely more important than the stockmarket, which is small in comparison. It is thus clear that if it is necessary to sacrifice the stockmarket by raising interest rates to rescue the Treasury market, then that is what’s going to happen. The rising Treasury yield curve, which has recently become very steep is indicating that rate rises are in the pipeline.

Smart Money has already got wind of this and has been stampeding to close out US dollar carry trade positions, hence the breakout and sharp rise in the dollar, and the plunge in gold. The ordinary Joe sat rustling his newspaper hasn’t got the faintest idea of what is going on as usual. Given the magnitude of the US dollar carry trade positions that have built up this year on the back of unprecedented negative real interest rates in the US it should be obvious that a intensifying stampede out of them could easily drive a massive dollar spike, perhaps considerably larger than the one we saw last year, especially given the precarious condition of many countries in the European Union. In this situation commodities and the stockmarket will be trashed.

Those of you who may be deluding yourselves that the dollar’s recent rise is just a countertrend blip might like to reflect on this article in The Wall St Journal titled Net Assets in Bullish US Dollar ETF Go Vertical in December . The point to appreciate here is that this asset buildup is not occurring at the end of a move, but rather at the start of it, and is thus a proxy for very high volume on the dollar breakout, indicating both that it is genuine and that the dollar is destined to go MUCH higher.

Finally, the idea that Big Money is going to be defeated by the “little guy” led into battle by his favorite cheerleaders and gurus is naïve and fanciful. We never try to beat big money because they have access to the best information, the information that really matters and they pull the levers and call the shots - instead we aim to “ride on their coattails”. Take a look at the latest COT chart above on which we can see that the Commercials, who are by the way very patient, are still running big short positions in gold. This chart implies that gold could have a long way further to fall.

By Clive Maund
CliveMaund.com

For billing & subscription questions: subscriptions@clivemaund.com

© 2009 Clive Maund - The above represents the opinion and analysis of Mr. Maund, based on data available to him, at the time of writing. Mr. Maunds opinions are his own, and are not a recommendation or an offer to buy or sell securities. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications.

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