Best Financial Markets Analysis Article Inexperienced investors in the commodity markets should keep in mind that while gold and silver look good now, silver dropped 59% in the last bear market and gold fell 32%. Both silver and gold held up better than stocks (and the dollar) early in the last bear market (as they are now), but eventually deflationary fears caught up with precious metals. Risk management is required for all positions, even “safe” positions like gold and silver. We own both gold and silver, but it is important that we understand the downside potential of any asset.

The chart below shows the performance of the U.S. Dollar Index relative to gold (2008-2009). Notice between points A and B, the dollar began to form a base relative to gold, which was a warning to watch gold holdings more closely. Gold peaked on March 17, 2008, just as the dollar/gold ratio was forming a base.

The chart below shows the U.S. Dollar Index in 2008. The Ultimate Oscillator, near point A, perked up as the dollar began to strengthen in a more meaningful manner. Near point B, the 200-day moving average began to flatten out, indicating a weakening downtrend. Near point C, the slope of the 50-day moving average turned up, which was another feather in the dollar bulls’ cap.

The chart below shows the dollar in 2011. In terms of similarities to the chart above, it is a mixed bag. Near point A the Ultimate Oscillator has shown some strength similar to 2008. However, the slope of the 200-day (point B) is still pointing down and not close to flattening out. The slope of the 50-day, near point C, does indicate a market that is trying to form a base. ADX, near point D, indicates a somewhat trendless or sleepy dollar. Sleepy markets often make a sharp move higher or lower when they wake up.

If the chart of the dollar/gold ratio begins to look more like the second chart presented above, in terms of forming a base, we would become a little more cautious on our gold holdings. The dollar switched places with gold in 2008 in terms of taking the “safe haven” lead. We may not see that switch take place in the near future with the budget and entitlement mess in the United States, but we must keep on eye on the dollar to properly manage our gold and silver.

We remain concerned about the possible domino effect on the economy with the first domino being government debt. The technical deterioration and fundamental problems outlined in our August 14 video also need to be monitored very closely.

By Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. As a registered investment advisor, CCM helps individual investors, large & small; achieve improved investment results via independent research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions. When looking at money managers in Atlanta, take a hard look at CCM.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.

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