Will a Dollar Rally Lead to a Gold Correction?

Filed in Debt, economy, Gold, Gold Correction, New Gold, US Dollar by on November 18, 2009 0 Comments

So this is what it feels like in an inflationary melt up. House prices were up 6.2% in the third quarter over the same time last year, according to data from the Australian Bureau of Statistics. House prices in the capital cities are surging. Stocks are surging. Gold and oil are surging. And counter to our prediction of an imminent, counter-trend U.S. dollar rally, the dollar is most definitely not surging. Take a look at the chart below. We’ve been writing about the decline of the dollar for nigh on ten years. So we looked at a ten-year chart to tally up the damage. It is considerable. Dollar Index Threatens New Lows What’s at stake with the interpretation of this chart? If the dollar rallies on short covering from the dollar carry trade (a BIG if), then other “risk” assets like gold, stocks, and emerging markets would probably sell off. The chart shows that the index’s 50-week moving average is set to cross below its 200-week moving average. That is mixed news. The first time it happened on this chart was back in early 2003. That was the early days of a long decline in the index. The second time, though the move failed to confirm the “flight to safety” rally of 2008 had staying power in 2009. Once the fear that gripped markets in 2008 went away, the investment world sold the dollar and started borrowing en masse to buy other, higher-yielding currencies and assets (like the Aussie dollar and resource stocks). That’s where we are now. But based on the chart, is the next move down in the dollar index a new low, which the crossing of the long-term MA by the short-term MA would suggest? Or is it a false move? Will the dollar quickly and violently rally for some reason (geopolitical perhaps) that currently remains unknown to the human beings of this world? “It’s an interesting chart,” said our technical analyst Murray Dawes. “But it is not useful for timing your moves out of or into trades related to the dollar’s movement.” “So you’re saying our chart doesn’t have any useful information from a trader’s perspective?” “Not really.” The one piece of important information communicated by our chart is that the dollar’s trend is down. But there IS a catch. The catch is that when this many people are this uniformly bearish, everyone is probably wrong. Consider this a warning then, that a dollar rally is just the sort of thing that will lead to a correction in the gold price and the stock market. We won’t speculate on the sort of things that could lead to a dollar rally. But surely they’re out there and sooner or later they’ll come. The other possibility is that the dollar is in its death …

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Will a Dollar Rally Lead to a Gold Correction?

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