Gold Versus The Dollar

Is it gold versus the dollar,  or are there other factors?  In this article we examine what the media slings around regarding gold versus the dollar and come up with a few surprises!

The media, plays the same one note melody on any given day. The commodities markets are reacting to the action of the dollar. If the dollar is up,  commodities and especially gold are down.  If the reverse is the case than gold is sold off.  This is such a myopic view, that it barely deserves mentioning here, except that most investors do not do their home work and believe whatever they hear on the news. Just to set the record straight, let me clearly state that, the commodities markets are based on a symphony of events and not just one note.  Gold versus the dollar is just one part of this tune.

This has been a dramatic week for both the dollar and gold.  Gold has moved to the upside in reaction to a number of events that are unfolding in it’s favor.  The dollar dropping below .80 is only one of the factors that is favoring gold at this time.  As of  the close on Friday, the dollar was sitting at 79.23, down 1.30, or minus 1.67 %. The following chart shows the dollar’s fall from grace of late.

The 5 day chart clearly shows the battle to hold the .80 mark and the capitulation that came on Friday. If it is gold versus the dollar, it looks like gold is winning.

The dollar is finally beginning to reflect the true nature of the events of this “financial crisis”.  I heard an interesting statistic this past week that is truly amazing and frightening at the same time.   The “Community Organizer in Chief” has added more to the national debt in just under 1/3 of the first year of his administration than all the preceding presidents combined.  This does not bode well for the dollar.

Add supply and demand to the picture, and it is clear that the dollar is headed way lower and that gold is headed way higher.  The consensus is that the dollar is driving gold.  I reject this totally.  The dollar is simply a player that has lined up in this game for it’s turn at bat.

If you look at the big picture on the dollar, it lost 40% plus of its value  during its last bear market between July ’01 and April ’08.  Gold on the other hand gained 235% during the same period.  If the dollar was the main driver for gold,  gold should only have increased by roughly 40%.  Supply and demand showed way more influence over gold than did the dollar.

I am not in anyway dismissing the dollar’s effect on gold, but rather I am cautioning that one should not be myopic and look at only one aspect of the the total picture.  The dollar will have a psychological impact on the gold market and it will accelerate gold’s upside move as it drops to the levels that I have mentioned in other articles, namely, .72, .62 and ultimately .52.  The dollar has the same impact on gold when the dollar strengthens.

Jim Rodgers predicted the dollar’s current change of direction on March 23, 2009.  He doesn’t proclaim to predict dates, etc., but he was pretty near dead on with this one!

GOLD!

Some think it is strictly gold versus the dollar, but we know better!  Jon Nadler of  Kitco.com has repeatedly been banging the drum that gold was going lower because of slowing gold jewelery sales around the world.  Unfortunately Jon is fixated on one aspect of the gold market!  As I have pointed out on many occasions on BuyGoldCo.com, the demand for gold coins and gold bullion would easily make up for the lack of demand on the jewelry side, and it has,  in Spades! The demand for gold coins and gold bullion has been extraordinary for the last year.   As the knowledge of the dollar’s demise spreads, both gold coins, bullion and gold stocks are going to go way higher.

When the financial crisis struck, everything sold off in a vain attempt to clear shorts and to save what was left of portfolios.  The dollar became the asset of safe haven as funds sold gold in order to raise money to cover other positions.  The dollar ran up against all odds during the panic.  Now the panic phase is ending and commodities are set to recover, with gold and silver leading the way.  Those of you that are holding physical gold should continue to hold and purchase more on any dips.

If you are already in gold stocks you should be rechecking your price objectives and planning when to take your profits. I would not be selling any more than 1/3 of any position at this point, unless you have a “dog” that you have been waiting to get out of.  As this move goes forward, I would recommend putting a trailing stop on the number of shares that you want to sell, so as not to miss out by arbitrarily picking a day to sell.  If this move goes substantially through the $1,000 level and holds above it, as I think it will, the rules of the game will rapidly change.

The Spyder Gold Trust, GLD,  chart shows the volatility in the gold market this past week.  This is just the beginning! These gaps on opening will grow larger as this move progresses.

WHY GOLD AND WHY NOW?

We have the dollar, supply and demand, and now we add world events.  We currently have two parties fighting for supremacy.   The big banks and the G-7 are all against gold because gold strength reflects the weakness in their currencies.  China and  Russia would rather see a gold backed basket of currencies replace the dollar as the world’s reserve currency.

China’s recent revelation that it has been in a continuous accumulation mode for the last several years and is now the fifth largest  reserve of gold has really energized gold holders.  Institutional and private investors now feel a solid floor under the price of gold.  $850 t0 $820 seems to be the downside risk in gold at this time. This brings to mind a simple question. Why would China reveal this information that could pose the threat to undermine the value of its $2 trillion in U.S. debt holdings?

China, up to now, has been careful to avoid buying gold on the international market, for fear, it has said, “of creating a stampede into the precious metals that would immediately increase the cost of its stated intention to continue accumulating gold towards the backing of the yuan as a global reserve currency”.

Apparently China has determined that buying gold with the $50 billion a year of interest that we pay them on our debt is a better deal than trying to maintain the illusion that is the dollar. It is more likely that they feel the dollar’s fall will be orderly due the world’s dependence on it and the increase in price will more than offset their losses on their dollar holdings!  This is a strategy that indicates to me that they are close to backing their currency with gold and moving off the dollar as the reserve currency.  This is another ominous sign for the future of the dollar.

Once again, the mainstream media is living in the past and trying to prop up another political myth, namely that the devaluation on the dollar is good for our country.   Nothing could be further from the truth!  It is almost to the point that if the media is spouting it, you should believe the opposite and you would be right 99% of the time.  The idea of the Yuan replacing the dollar as the world’s reserve currency, is closer than most people would think.  Gold will go ballistic when the Chinese opt out of the U.S. Dollar in favor of a gold backed Yaun.  This event could be the catalyst for the collapse of the dollar at .52 and beyond.

Bill Murphy, of GATA (Gold Anti-trust Action Committee), had this to say.

“The Gold Cartel is giving it all they have no, as evidenced by the sharply rising gold open interest on the Comex … up some 23,000 contracts on Wednesday and Thursday. They are doing all they can to counter new spec buying.

My hunch is the next time we see $1,000, and that could be very soon, gold ought to take off from there, giving us more upside dynamic daily moves. The reasons to own physical gold are off the charts … HUGE investment demand, shrinking visible central bank supply (unrelated to the cabal), shrinking mine supply, shrinking dollar, concerns over sovereign wealth debt, a horrible US economy, and a US printing press that is going flat out and will have to for some time to come.

In my opinion, all gold has to do is to stay over $1,000 for a few days, and then all kinds of bells and whistles go off.”

This may or may not be the move through $1,000 that sticks, but it is certainly starting to look that way. It would be wise to pay close attention to this move and to be prepared to take some stock profits as it continues.

On average, gold producing stocks are up 22% this year in the Midas Model Portfolios. Producing juniors and close to production juniors are up between 20% to 200%, depending on the company,  since January ’09.

I am leery of chasing rallies, because I have been burned in the past by doing so.  With that in mind, I am not looking to be buying this rally, rather I am assessing my sell points on stocks. If the move is to and through $1,000 there will be plenty of profit available to apply to the next pullback.

Three stocks I am considering are Yamana Gold (AUY), New Gold (NGD) and Nova Gold (NG).  I will mention these in future articles  when I am getting ready to purchase.  As always do your own due diligence.  I am not a professional trader, so you should not sell or by a stock on my recommendation.  You should always do your own research and remember, there are no sure things and only invest money that you can afford to lose because that is always a possibility in the stock market.   I just call them like I see them!

Till next time, good luck and good trading.

More Gold Market Analysis:

• Silver Versus Gold
• The Future Of The Dollar
• Buy Gold Coins, Bullion to Hedge Dollar Drop
• Of Gold, The Dollar, Russia, China and Vending Machines!
• Gold and the Dollar: Joined at the Hip

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