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Interesting Days Ahead For The Dollar And Gold

December 2, 2009 by  

Interesting Days Ahead For The Dollar And Gold

Almost daily the price of gold is reaching new heights. So where are we headed from here?

To answer this question, we need to recognize that there are still reasons to be cautious, in the near-term, for gold. The market really had gotten overbought, and the correction of late October probably didn’t release much of this pressure.

In addition, the greenback’s fall had gotten to the point where our trading partners were beginning to scream bloody murder. With a growing international consensus forming to abandon the dollar as a reserve currency, even the Obama administration must have been forced to pay it a bit of attention. So, despite the fact that a lower dollar is desirable in Washington (both as a supposed lubricant for the economy and as a payoff to various political constituencies), I wouldn’t doubt that the October respite in the dollar’s decline was orchestrated by official sources.

If so, the current dollar nosedive could lead to some sort of interventioneven mere jawboningthat might breathe some life back into the greenback and send gold tumbling.

And it wouldn’t take much movement in the dollar to knock the snot out of gold, because the yellow metal not only responds inversely to the dollar’s moves, it leverages those moves in the opposite direction. That’s why a very mild rally in the dollar in October led to a much greater decline in gold, on a percentage basis.

The new Kitco Gold Index, featured near the top of their home page, is a great tool for illustrating this effect. For any change in the gold price upwards or downwards, it shows the amount of change that relates to the percentage change in the U.S. dollar index. The balance of the change in gold is due to, as Kitco calls it, “predominant buying” (or “selling”).

This tool also shows how the leverage cuts both ways. On some recent days a fall in the dollar index of around a half of a percent would vault gold up nearly 2 percent.

The bottom line, both in the short and long term, is that the dollar will continue to drive gold, as well as the U.S. stock market. And, as a corollary to this, any positive economic news for the American economy will send the dollar tumbling… and those other two asset classes soaring.

Why? Because, as I’ve noted recently, there is a huge flood of liquidity, in the form of credit, currency and excess bank reserves, overhanging the economy, waiting to be put into effect.

Think of it as the contents of the Pacific Ocean, suspended above us in an enormous balloon. Any sign of sustained economic growthgrowth that can unlock the still-frozen credit marketswill serve as the pin that pricks this balloon.

When that happens, all this newly authorized money that has been hidden behind the scenes will suddenly pop into existence as new dollars and new liquidity. The end result, which the market clearly sees, is that the value of all currently existing dollars will be substantially diluted.

So, at least over the long term, any view of gold’s future must be intimately tied to the prospects for the U.S. dollar.

And, given the trillions in new deficits and debt… the prospects for an unleashing of unprecedented, pent-up liquidity… and the clear intent of the regime in Washington to continue expanding the role and expense of the Federal government, is there anyone who can be bullish on the dollar?

The Past Points To The Future
Assuming, as we clearly must, that the long-term trend for the dollar is down, where can that scenario put gold in terms of price?

The past may help guide us. As I noted in my speech at the recent New
Orleans Investment Conference, gold’s impressive breakout over $1,000 appeared to be very similar to previous rallies in 2005 and 2007. Both of those previous breakouts occurred after significant corrections marked by very similar patterns in their price trend lines and moving averages.

Most importantly, as you can see from the accompanying “analog” chart produced by our good friend Ron Griess of Thechartstore.com, the 2005 and 2007 rallies took the gold price up 75 percent and 57 percent, respectively. In 2005, the rally lasted about 240 trading days, while the run in 2007 was shorter, at about 180 trading days.

If you mark the beginning of all three rallies to the day each broke out of their consolidation triangles, then the current run in gold is about 90 trading days old, from its breakout on Aug. 17.

Again, assuming that the future will at least rhyme with the past, if not repeat it, then gold would have from 90 to 150 trading days left in its current rally. If the rallies are growing shorter, as our two-datapoint trend might indicate, then the rally may be of even shorter duration.

As to the degree of the rally, let’s project that it could take gold from 40 percent to 75 percent higher (again, assuming we see a performance similar to the 2005 and 2007 breakouts). From the Aug. 17 close of $937.30, that would translate to a gold price in the range of $1,312 to $1,640.

For this to happen, however, I’m convinced we would need an associated fall in the dollar. But, given gold’s leverage to the greenback, a fall of only 10 percent to 15 percent in the dollar index would likely yield the types of gains we’re talking about for gold.

So, a fun little exercise in math. Let’s hope it works out. In the meantime, suffice to say that I’m bullish on gold for the next few months, but a bit concerned about volatility along the way.

Brien Lundin

is the editor and publisher of Gold Newsletter, a publication that has ranked among the world's leading precious metals and resource stock advisories since 1971. To learn more about Gold Newsletter, visit www.goldnewsletter.com. Mr. Lundin is also the host of the famed New Orleans Investment Conference, the world's oldest and most respected gold investment event. To learn more, visit www.neworleansconference.com.

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  • ASGreen

    Take about hedging your bets. Gold might go up. Gold might go down. I don’t agree with everything that energy guy writes in his columns but at least he takes a stand. I don’t know any more after reading your article than I did before. In fact I probably know less.

    • s c

      Whoa, AS. Either you’re for or against having gold. It’s the same with silver.
      If you want ‘prophecy’ or promises, talk to a politician. Of course, the downside to talking to a politician involves a ‘source’ who’s always in it for himself. It’s no coincidence that most politicians make traders and used car salesmen look like innocent cub scouts.
      There few guarantees in this life. Four you can count on are 1) higher taxes 2) bloated, useless government 3) death and 4) elected weasels who belong in front of a firing squad.

      • ASGreen

        I am for making money. If gold helps me do that fine. If hog futures is the way to go that way is fine too. I don’t care about the politics of gold, I care about making or at least preserving money. I thought gold was an investment, not a religion. And its not prophecy it’s called advice. Some of the other columists actually do that.

        • DaveH

          Brien is just giving us the facts. It’s up to us to decide which way to leap. Given Congress and Obama’s lack of restraint, I think the dollar is going to continue going down until the voters clean House.

      • Paul Revere

        Gold And Silver Is Not An Investment,Law breakers it is Our Pockeyt Money and our Bank account Money. Under the Genious of the Framers.to prevent you law Breakers to allow the enslavement of Americans and the Banker You Owners They Made a Law For All You Law Breakersand cemented it in the CostitutionAnd Volker Warberg Bradise Rothchilds and the lowere end deceivers coned you And it Finaly Caught up to You. The United States Can only Borrow On the Good Crdit of the United States (Wahingto D.C and its Possesion) Not on any States Credit The U.S. Government Can only Borrow Gold and Silver Coins From Americans or Forighn Lenders.
        The United States can only mint Gold and silver Money…
        No state Shall Make anything But Gold or Silver Coin a Tender in Pament of Debits .Your Zionist Jew Anti American Notes State This. “This Note is Legal tendeer for All Debit public and Privateand will be redemed to Lawful Money at ant Ustreasury or federal reserv BankIt is Not Money it is a note to get money The Silver and Gold Paper Certificate,ar the US Notes Were Neveror are never the Money. They Were the Bill To Get the Money. The United States is Indivisible What the States Can not Do ,The Niggardly United State Government Or The Anti American Bankers can not DO…
        As Laong as the Toilet paper With green Ink on Them The(private Not Federal ) Federal Reserve Notes Wer Leaga,Never Lawfull,Because they could be redemed back to Spiece,Gold or Silve Lawful Money…
        But When Your Anti American Jewish LobbyFelix Warberg Volker and Allen Greenspan and all themember and parties involved from Richard Nixion removed the Backing and Johnson the Silver coins afer they Killed Kenedy,Stoped the Minting Of Silver or Gold Coins for Circulation. Then And only Then the Federal Reserve Note Became Illeagal and Unlawful.And The Deceivers Had the Lawful requirement to redem them was then removed from all the puke notes
        Because Mr Rrooevelt Comitte fruad and Did not Borrow Gold and Silver as required by Law He Also Broke the Law and Fruad has no statute of Limitations and all that Cospired to steal American Money and replace it with debit Instruments to Enslave America. if He or any one involved in the Crimanal Fraud with Franlin Delano roosevelt And Herbert Hoover There estate it should be Conficated if found Guilty and the Private Not Federal Reserve Banks and branches Made to Return the interest and Assets and Desolve the Private Federal reserve Banke as it was His and their plane to put ever American into the Debit of the Anti American Forighn Banker Lein all our property,through wars enviormental laws inflation racial unrest, and the Income Tax was collected to pay the interest on Credit Not Money they never lended ,that can never to be paid off..
        The Not Federal reserve Note is only Worth 4.5 Cents Comrades

        • http://PersonalLibertyDigest Larry Avery

          Dear Paul Revere
          You are right on , about the who what when were and why of our fiat money problems . Also the banking system is a total farce . I have a few comments to help you out . When you misspell words a red wiggle line appears under it , correct those words , watch your spacing do not run two words together it makes for harder reading and people will lose interest . Remember when your done writing go back and read it out loud and slowly , it gives you a different idea of the flow of your thoughts and allows you a chance to change them at that time .

  • SS McDonald

    Horse Hockey. One does not buy gold for appreciation; one buys gold for a hedge against the inevitable collapse of paper currencies.

  • http://victorbarney@embarqmail.com Victor L Barney

    The purpose of all this “mumble-jumble” is to move into a “New World Order” currency system that will be the “cashless” society described in the Set-Apart Bible in both the Old and the New Covenant! It seems only the “leaders” of the nations within the U.N. know this! I love the emblem in the U.N. building, not a dove of peace, but a huge “white horse” representing war! Can the anti-messiah be far behind?

    • http://www.bucksplace.webs.com Buck

      Yes all that is taking place is just a design to bring in the new world order!!
      then when the Lord takes the Church from the world the Antichrist can reveal himself!!

      Comming SOON

      • http://royaltoypoodle.com Maxine Albritton

        Gee did our president say we are not a Christian Nation anymore. I see some sparks of Christianity here. Christians are aware of the culmination of activity that takes place in the time of Our Lord and we have a full understanding of Armageddon. I love the remarks the non- Christians make about that. Like we are waiting for it. Not really that would be like waiting for WW111. The economy is just a part of all of it. the Black Horse and the Red are having a good time.

  • Richard

    Mc Donald has it right. Our “expert” sounds more like a trader, and like all traders short-term is where he plans to make his money. If you get out when the time is supposedly right, it might be very expensive to get back in. If foreign banks like China’s continue to raise their reserve levels of gold by even one or two percent, gold goes to 2000.

  • http://victorbarney@embarqmail.com Victor L Barney

    Gold isn’t going to save the world this time because the winner of the next war will be the Hebrew Deity named “Yahweh” and he through his son, “Yahshua” will not be bought off by gold and especially by this coming New World Order’s “cashless” society under Lucifer (“coming his own name”! Remember, the whole world is deceived by him!
    PS: Hebrew in the only “inspired” language (Paul in the new covenant was even spoke to in Hebrew by Yahweh!)both confirmed in the old and new covenant and by the way, the “Kings James” Bible was only a “translation” (not a transliteration) of the Hebrew text. Not to mention the fact that the Kings James version was actually “translated” for a woman monarch, not a king! “Jesus” (also Jehovah) came from Petrus Galatinus in 1520 for the Vatican to pay honor to the Greek highest deity (Zeus)! check it out! It’s history!

  • http://cfl.rr.com Wayne Thomas Franks

    Okay, gold goes up. Gold goes down. The predominate scale of charts show gold climbing since 2001. With the US at about $75,000,000,000,000.00 ($75 Trillion) in total debt, I can’t see why anyone would think this is a short term bull. Folks who think so need a dose of history. What happened during 1933? Gold went up about 75% overnight. In 1971 gold started up again and never really looked back. I’d rather have some of that shiny gold stuff than a few crisp new Federal Reserve Notes (debt).

    • MW

      I’ll agree with you! I’ve been studying economics for about 40 years.
      I even have a degree in it from a very well known private university.
      (By the way, the degree cost only $12k back then, today to attend this institute to obtain the same degree will cost about $140k!). When
      I was a student, I often asked the professors if the US economy would ever have another depression like the one the nation experienced between 1929 to 1941. They oftened quipped: will never happen again, too many safety nets in place, government now has a bigger role in regulating the private sector, etc. However, they forgot one important lesson in life, never say never! Here we are today, on the brink of perhaps the greatest economic catastrophe in history. Many economists in academia, government & the private sector are now saying that its a question of not if but when the whole economy collapses along with the prevailing social order! Scarey thought, indeed. However, those prepared for this coming clamity will more than likely survive & perhaps even prosper from it. Yes, I’d prefer gold & silver over any fiat currency including Fed Notes. Also,keep in mind, too that if things really get bad, all those stocks, bonds & mutual funds in your portfolio could become totally worthless. Remember those of you, Penn Central in 1970 then fast forward to Wall Street & General Motors last year. This time, you can bet that there will be a complete government takeover of the private sector. And the bureaucrats, czars & politicians could care less how many shares of stock you own in XYZ Corporation. As far as their concerned, it’s your loss…live with it!

  • Richard Pawley

    Many things have to happen before the “end times” end! People have been predicting the end of the world for hundreds of years, or for 1009 years, if you want to get technical. Even the disciples of Jesus were concerned about it 2,000 years ago. However, we are closer than we were. I go into some detail about this in both my books. Some are worried that the world will end in 2012 but it didn’t end the last time this rare celestial alignment took place 25,000 years ago (our being here proves that) and we have much bigger problems to be concerned about (as many as 7 million more homes will be foreclosed on this year). Gold is merely a way of preserving wealth, seldom a means of “getting rich” unless you own a gold mine. Although I have read that there are provisions in the homeland security manual for the seizure of gold that is no more than twice the price of bullion – when Congress gets through spending all the borrowed money they can get their hands on, few own gold today like they did in the 1930′s. Today it’s all about stocks and bonds. Gold could take a hit but that only concerns speculators. Those who own it for insurance don’t care about the price. Gold will undoubtedly go up another 30+ percent but I have a hunch food is going to go up much more than that in the years ahead. In any event, it’s going to be very interesting to see history in the making. If you are a follower of Jesus and living according to his teachings remember he said, “Ask and you shall receive” so you can pray about anything. Those who know this will have it much better off in the hard times that are coming!

    • http://victorbarney@embarqmail.com Victor L Barney

      In that you apparently except the name that we are to be saved by as “Jesus,” the messiah, which was originally developed in the Vatican in 1520 by Petrus Galatinus for the Vatican to honor the Greek highest deity “Zeus”; I hope you have not left the universal “mother church;” that many in “Christianity” love to rightfully call the mother of the most famous Babylon mystery religion!

      PS: According to both the old and new covenant (any translation,if not transliteration), the only inspired language is Hebrew! It says so! They all do. In addition, there is no word for Zeus in Hebrew!

      • Willie Stoker

        Victor, The devil will go too and fro upon the earth deceiving people.
        It is quite apparent that you have fallen victim of him and his shenanigans.
        You can get a copy of the scriptures that is printed in the original languages, which include Hebrew, Greek and Aramaic, with the word for word translations, that way you can get the actual meaning of what is said, and not be lead by some crack pot who thinks he has found some great revelation that no one else has discovered.

        A closer study of the scriptures will reveal to you that Zeus has nothing to do with the Living God, he is a pagan god which was believed to be a Nephilim.
        After Jesus was resurrected and ascended into heaven there was no incident of him coming back to earth. When he returns again it will be to conquer the evil rulers of the earth and set up his kingdom.
        When that happens the tribulation will be over and there would be no reason for anybody to try to influence him or try to buy him off with Gold.

        The point of this discussion is to determine the best way to survive the coming collapse of the US currency. Real born again Christians do not expect to be here when the tribulation starts, and the Antichrist institutes a cashless society and one must have the mark of the beast to buy or sell,where gold will no longer have value to us.
        We are thinking about what we can do in the mean time.

  • gili4

    Yeah yeah! All this technical mumbo jumbo about the whys and wherefors that influences the value of gold vs. the dollar is all a matter of intellectual academics. The bottom line is – if your gut tells you to buy gold then do it. Otherwise just ride out the highs and lows like most others in the world and hope for the best.

    • http://victorbarney@embarqmail.com Victor L Barney

      When this “mumbo-jumbo” is over, gold will do nobody any good because the winner can not and will not be bought off with gold (and, that’s not America for sure)!

  • CJ

    Humm, religion aside, too many people apparantly see the varable in the equation as the constant (the dollar being the true varable). Looking another way, if a dollar buys both an ounce of gold and a bussel of grain on day one, then five years down the road that ounce of gold may return three dollars, but it takes six dollars to buy the bussel of grain, is the dollar’s appreciation really a good value? NO, because the ounce of gold would buy more than the bussel of grain. In some Middle Eastern countries, divorces are quick and women are left with only the articles they have on. That’s a primary reason they wear so much gold. They never know when the divorce may come. So, when our economy, and government, crashes, the “note” in your pocket will mean nothing. Metal will still have value.

  • bruce

    gold is always good to buy because you give them paper and they give gold.which would you rather have paper or gold?you should also buy guns and land because guns hold there value and can last a 100yrs or more.buy land you can grow food on plus this type of property holds it’s value.don’t for get reloading equipment.

  • http://www.whoisjohndenton.com John Denton

    They say that 40% of your income should be transferred into Gold & Silver. Also don’t buy paper notes for Gold because in the end its worth no more than the green paper you buy them with. Make SURE you have the actual Gold & Silver in your hands, don’t lock it up in a bank! Bury it in your backyard if you need too, but keep it close to you. You’ll be glad you did when the dollar tanks and all the banks begin going under ;-)

  • Trans-Mutant

    Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that’s not counting any additional deficit spending, which is estimated to be around $1.5 trillion. Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That’s an amount equal to nearly 30% of our entire GDP. And we’re the world’s biggest economy.

    Where will the money come from? The printing press.

    The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt. This weakens the value of the dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their U.S. bonds plummet.

  • Jim Bob

    I am with those who see gold as a means of weathering through an economic storm as opposed to a short term investment. John Denton said it best when he advised to have it on your person — not in the form of paper or locked up away from where you can get your hands on it. Bruce is right about the guns. Store up food, water, gas, etc.

    It’s coming!

    For you Hebrew speaking fellows: את חרא עומד להכות את אוהד!

  • paul

    For those believing the end-times are near, the only solid investments are those that advance His kingdom. This situation is a test of charactor. I pray we pass.

  • Iconoclast

    Actually, the ONLY answer was given by the LORD Himself in 2 Chronicles 7:14. “If My people who are called by My name will humble themselves, and pray and seek My face, and turn from their wicked ways, then I will hear from heaven, and will forgive their sin and heal their land.”

  • James

    Richard Pawley has it right, gold is simply a storehouse of wealth, not an investment. The amount of gold in existence keeps pace with other commodities, that is, an ounce of gold always buys about the same quantity of corn or beans. When the price of gold goes up (it’s now at $1220/oz.) it just means its value has gone down.
    Back in the 30s, gold was about $25/oz., then, a nickle would buy a double-dip cone of real ice cream – with a cherry on top. After the market crash of ’29, people scrambled for gold and the banking system nearly collapsed. FDR had possession of gold outlawed. President Obama said (on a 60-minute interview, when he was president-elect) that FDR was his hero and that he intended to follow his example to get us out of this mess we’re in.
    However, FDR didn’t confiscate silver. Right now silver is at $19.23/oz. The traditional ratio between gold and silver is 16:1. When gold went to $850/oz. 30 years ago, silver went to $50/oz., a 17:1 ratio. Thus silver has a lot of catching up to do – and Obama probably wont confiscate it. Our dollar is being spent out of existence, so the ‘Amero’ can replace it, like the ECU did in Europe.

  • James

    P.S. “It just means its value has gone down” should have read: ‘It just means the dollar’s value has gone down.’ Sorry.

    • Paul Revere

      James Read the Misspelled and Poor Grammer of Me .The Reason I am answering This is Because we are Now Aprocjing December 7Th thae day roopsevelt Let Japan Attack Pear Haurbor .
      When I was Growing Up we were Told all the Bad Thind about the Kihiser and Them Japan But No one Ever Asked ,Whjy when Japan and Italy was american Allies in the first World War Why did Jaspan Attack peal Haoubor and What Made Germaney and Italy Our Enemy>Not what the Media Say but What Was the Real reasoWhm They were once our Freinds Like Sadamm Hueisan And Iraq and Now Off To Afiganistan and Next Iran Remembe Iran Was Our freind Too

      PS.Yes its value has droped to 4.4 cent on the note And a true American Never should have taken it as Value. We All Break the Law when we did

      • James

        Paul R., I think you know the answers to your questions. Cat got your tongue? FDR spent a full year in provoking Japan to attack the U.S. because Americans were dead-set against another world war. Germany, Japan and Italy were allies, but Germany would never have attacked us. They were, however, planning an attack on the Soviet Union. Japan was attacking soon-to-be communist, China. By provoking Japan, FDR killed two birds with one stone, he saved communist-headed China and allied us with the Soviet Union against Germany. In FDR’s 12 years as president, he nationalized the entire U.S. economy, even though 6 of his socialist programs were declared unconstitutional. FDR’s administration was riddled with communists, he obviously loved Stalin.

  • James

    In 1930 gold was $25/oz., a double-pan loaf of bread was $.05, and corn was $.07/bu. So an ounce of gold would then buy 500 loaves of bread, or 357 bushels of corn.
    Now gold is $1200/oz., a good loaf of bread is $2.40, and corn is $3.26/bu. So an ounce of gold will now buy 500 loaves of bread, or 368 bushels of corn.
    Gold is simply a storehouse of wealth, it maintains its value. If one has paper dollars lying around since 1930, they have lost over 95% of their purchasing power. If those dollars had been converted into gold back then, no such loss would have occurred.

  • Harry B

    When an American co.for example Itronics,ITRO, is producing silver bullion and is using green technology,that is the future of availability and sold and bought in the U.S.A.Silver producing companies will keep us from shortages and have available supply for America.

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