The Dollar and Gold Inverse Relationship Still Matters – For Now

From my Current Thoughts on 3/24 I put up a chart of the dollar and said: “Today was a consolidation day before the next move, which can still go either way.” We have seen the dollar since fall and gold take off higher with today’s move a significant one. Yes, for now, the dollar still matters. We have to let this move in the dollar lower play out and let gold top where it tops. Believe me, it will top. This range bound move in the dollar and gold is just normal price activity. Nothing to get excited about.

The Dollar Is Still Key

Here was the chart I posted on the 3/24 followed by the current chart of the dollar on 3/29.

Gold does have a little life left in it and that’s just fine. My advice of cost averaging into a position and buying on the dips (don’t chase prices higher) has paid off for many. But there are also many who are waiting for my all in call and I think those investors will be rewarded as well.

Have We Bottomed In Gold?

For those that think we have bottomed in gold and are still off to the races or those who think the dollar is going to crash, well, you just don’t know what’s really going on in the world. You can’t separate micro thinking from macro, like Peter Schiff every year calling for the dollar to crash. You all know I am not one sided in my thinking and not like every other gold dealer who sells gold being a chicken little, sky is falling, fear mongerer. It sure would be easy to do and make a lot more money doing it, believe me. Why don’t I just join that crowd? It’s because I owe it to you to call things  like I see them and so far have done that pretty good.

The prices for the dollar lower and gold higher can extend a little but this will come to an abrupt end. We will see some big down days in gold in the not too distant future. But first we have to let this dollar weakness play out. The strength in the dollar will return and it will come from any of a number of areas in Europe or possibly a move by Shinzo. But the dollar can also benefit from another problem in China. China’s a whole different issue that I write about in my book and what you need to know about this market is that it’s a very young market. They are trying to play a game they are not good at and somehow future growth will take care of any moves they make today. It’s a similar story played out everywhere that will implode everywhere else first with the U.S. being perceived as the last bastion of safety. Heck, look at a chart of TLT and you’ll already see money flowing into the long bond. Do these investors know something the rest of you don’t? They sure haven’t been hurt with this trade.

The Fed and Their Credibility

One thing you know I have said is the Fed would not raise interest rates anytime soon and the December rate hike was a “credibility” raise. The last Fed meeting they had cut back their number of rate hikes from 4 to 2. I still say there will be no rate hike this year.

Today Janet Yellen spoke at the Economic Club of New York and simply repeated what was said at the last meeting that economic readings are mixed and they will proceed cautiously. Of course she is going to talk markets higher because that is all she and the Fed can do; talk. I mention ‘talk the talk” all the time in my articles and Current Thoughts. I’m also pretty good at calling their bluff. Why? Because I analyze the data and don’t ignore it like the Fed does. They talk about their dual mandate of “maximum employment and price stability” and I don’t know about you, but unemployment using the data they tout is just fine and prices have dropped for most things that are not government backed with the downturn in commodities (I address all this in my book as I know many will say here that prices are moving higher, but understanding why they are in some areas is key).

The fact of the matter is the Fed doesn’t understand what a deflationary credit contraction is. They can’t wrap their minds around all the massive monetary stimulus they have created for decades at some point has to have a reversal of fortune. We got a taste of it in 2007-2009 in most every asset on earth. We’ll see the same thing occur soon enough.

Europe is a mess. Japan is a mess. The U.S. is a mess too, but we are not as bad off as these two areas that make up a little over 70% of the Dollar Index. These countries Debt to GDP ratios are worse off than the U.S. For the short term we can look for the Euro and Yen to get stronger possibly but the chickens will come home to roost in those countries. Remember it wasn’t that long ago that little old Greece caused havoc in the world. What happens when Italy or Spain join the crash party? Do you really think all problems have been solved in Greece?

And I’m waiting any day now for some move by Prime Minister Abe Shinzo to weaken the Yen. They have to. They have the world’s largest Debt to GDP ratio and the poster child of what’s to come everywhere else.

Conclusion

I have said a few times that gold can get to that $1,300 mark and it may be marching up there to test $1,280 first. If so, then $1,300 is an easy call. We saw gold try and move towards breaking below the $1,200 mark but just couldn’t break that resistance. Silver couldn’t break $15 either. Those are your marks that need to be broken and by then you should have some insurance in place against any longs in the metals you may have. A good investor may want to begin cost averaging into a short position in gold and silver should we get to the $1,300/$17 mark (knowing they can go a bit higher).

For those that think I am possibly playing both sides, I am not. I am 100% in the camp we break lower.

Announcement – Illusions of Wealth book

As long as it has taken as I am such a darn perfectionist, will be off to the formatter this week and they have said it would only take 2 weeks to finish. I am looking at 3 weeks and the book will be out to the public. If you have not signed up for the announcement of the release of the book, you can do so here: http://illusionsofwealth.com