Gold and the Dollar

Gold and the general markets get a bounce on the good news, just kidding! November jobless rates over 1/2 million, real interest rates nearing zero and the new administration is promising any where from $600 to $800 billion in new stimulus money through a massive infrastructure investment scheme. This past weekend, President Elect Obama said he wants to create millions of new jobs by

“making the single largest new investment in our national infrastructure since the creation of the federal highway system in the 1950s.”

I can understand gold’s up tick, but the market going up appears to be a little bit of wishful thinking.  Infrastructure investment might slow the jobs decline some, but it adds to the nation’s debt burden and does nothing to address the root cause of the financial turmoil, namely the derivative problem.  This economy need major surgery, not a band aid.  Derivatives are the financial elephant in the room that no one wants to talk about.  Until they are accounted for and a fix is put in place so that they cannot return and wreak havoc on the markets, the economy will not be able to move forward solidly.

Now for today’s action.  The DOW is currently up 307 at 8,942, the NAS up 53 at 1,563 and gold is up $20.10 at $774.40.  Gold is still linked to the general market for the time being.  No major moves up will take place until this linkage is broken.

“Metal prices are higher on account of a short-covering bounce from extremely oversold conditions and on positive sentiment emanating from weekend news that a deal with Detroit’s automakers might be imminent,” said Edward Meir, an analyst at MF Global, in a research note.

I agree with the over sold conditions of gold. There should buying now of a safe haven nature, but that is not what is happening.  Gold is looked at as just another commodity.  If news comes out that leans towards improvement in the global financial situation then the market goes up and gold goes up with it.  Gold’s major move will occur when this relationship is broken and gold rises strongly on a day when the DOW is down 5 to 6 hundred points on the day. That day is nearing.

The dollar index (DXY: 85.71, -1.40, 1.6%) which tracks the performance of the dollar against a trade-weighted basket of six major currencies, traded at 85.91, down from 87.14 in North American activity late Friday.  The dollar is another major link to gold.  As the dollar goes so goes gold, only in reverse.  The dollar’s bull run is in very over bought condition and and should be heading towards the 72 level shortly.  This will be very bullish for gold.

Once the dollar starts to retreat everyone will “pile on”.  Funds will start buying gold and shorting the dollar, while foreign money will start moving out of Treasuries and into the metals.  What starts as a trickle will shortly be come a raging torrent feeding on itself.  That is why it is important to pick up positions before the trend is clearly up.  This buying opportunity might last as long as a year, but quite frankly I think it will end sooner than that.  I guess the question is how long will the “Obama Effect” last.  All it takes to penetrate “smoke and mirrors” is a stiff breeze.  Look out, there is hurricane approaching!

Till next time, good luck and good trading!

More Gold Market Analysis:

• Star Wars, The Dollar and Gold!
• Is Soros Trying To Collapse The Dollar?
• Long Bond/Dollar Say Buy Gold
• Gold and the Dollar
• The Future Of The Dollar

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