Posted by: L | July 26, 2007

Dollar dilemma…….

Whither the dollar? A question of some importance….not simply financially. But also for civil freedoms. The shakier the whole financial structure becomes, the more intense the government’s interest in monitoring, controlling, securing, and confiscating property and savings becomes…and the more likely controls of financial inflows and outflows become.

And the less likely it is that citizens will speak up for fear of becoming a target of the feds.
The dollar index closed below 80 this week, looking as thought it had finally bought it. But a quick check of the historical prices shows that actually the index closed at that level in December 2004. And bounced.

Well, you know what happened in 2005.  The index went steadily up, giving corporations a window for repatriation of their foreign earnings (and you thought they did it for for love of dead presidents, huh?) and kept gold in limbo. But then surprise again: In 2006, the buck resumed its slide down and gold shot up to highs not seen in more than a couple of decades. Come late spring and the gold bugs and sellers were screaming gold $2000…

Too bad it didn’t work out that way. By fall, gold was again down and bouncing around far below its high, stuck in a range. And meanwhile, this year, the dollar already weakening steadily, has fallen off the edge.

Is it the end this time? Or another feint? Who knows, with all the manipulation and massaging of prices that go on.

It could be a double bottom . A double bottom is a pattern that supposedly tells you when a slide down has found a resting place — from which a bounce upward can be expected. How do you see double bottoms? True believers will swear by shapes as fleeting as clouds and as deceptive as tea-leaves. Hocus-pocus, say fundamentalists. But like tea-life reading, chart reading may be hocus pocus, but it also has an art to it that can make good sense. It isn’t so much a pattern you see as a feel for the pattern that you cultivate. Watch those little ticks, see the numbers, how fast they run up or down, what time of the day they do it and how heavily, and you can begin to feel the pulse of the movement of prices.

(OK, I’m getting poetic, but it’s true). And gold’s pulse hasn’t felt all that strong in a while. But neither has the dollar’s. So when the  bottom of the double bottom shook and gave just a bit more, sending the buck below 80 this week, I wondered if this was it.

But no;  it bounced. Maybe just a dead cat, but then again, maybe not. The question is — is gold now a safe haven, or a currency, or a commodity? Is it coupled to the dollar or uncoupled, and if coupled, is it in lockstep or reverse?

Here’s Brian Bloom at 321gold.com

with a summing up that looks pretty plausible to me:

“If my mental model remains intact, this is the outcome I would expect to see over the next few weeks:

1. The US Dollar Index breaks up out of the falling wedge, reinforcing the argument that the Primary Trend of the US Dollar Index is “up”.
a
2. If this happens, it is likely to scare the pants off the gold bugs, who will dump gold holdings – causing the gold price and gold shares to pull back.
a
3. Once it becomes obvious to all and sundry that the US Dollar will not be expected to break down significantly below the Maginot line at 80, the bulls will be out in force. The Industrial Indices will rise (because of inflation), and they will pull the gold shares with them.
a
4. Commodities and oil will start to shoot upwards (again because of inflation) and the gold price will at that point break to new highs.
a
5. When the market as a whole sees that the inverse relationship between the US Dollar and the US$ denominated Gold Price has finally been severed, the gold price will likely scream upwards in its capacity as a commodity. It can be seen from the following ratio chart of gold to the $XOI that gold has a lot of catching up to do.”

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