I am a gold bug, there is no question about that. I am also a long-term bear on the USD because I know that Washington will never reverse their fiscally irresponsible ways of the last 30+ years. However, I feel that gold has made a huge run in recent months and the USD has made a big move to the downside as well. This will not continue as stocks are beginning to struggle and earnings are not as good as many have expected.
This means that the dollar will more than likely see some strength in the short run, driving stocks and commodities lower. This will certainly drive gold below the $1,000 level which will bring about a much better buying opportunity for those looking to buy. Not to mention, other metals have largely been ignored in the recent run up in gold prices, i.e. silver, palladium and platinum are well below their 2008 highs.
Whether or not this equity rally was liquidity induced or not is really irrelevant. The one true correlation that we can draw is that the dollar's losses were stocks and gold’s gains. This will stop as we see a reverse in this trend in the near-term. I see this happening based on the trading patterns over the last few days and the market rally losing its ability to sustain itself. It is really unreal that the market could simply continue to move higher without much skepticism from participants on this fantastic move, but it is what happened.
The one thing we know is that at no point in history have we ever seen such a snap back in equity prices in such a short period of time while we shed jobs and credit continues to contract. Not to mention economic growth is anemic at best. Subtract government activity and it is downright ugly. But buyers in the USD will come back as the bearish trend in the short-term is actually bullish. Also, the dollar's inability to maintain a new low makes me think a rally is in store in the next few days, which is bad for stocks and precious metals.
Because of this, I am not buying any metals right now with the exception of palladium. It is my favorite and in my opinion has the most to gain no matter what happens. My feelings on the USD in the short-term explains why I am short the market right now. I opened a position 10 days ago and added to it on Monday. I will more than likely add to it.
No matter how I run the numbers I am coming up with a fair value of the S&P 500 of between 800-900, but that is my opinion and what makes a market. Eventually, valuations will have to matter in equities and a stronger dollar will force a revaluation quickly. On the flip side, a major devaluation would do the same thing.
On a long-term basis, until Washington changes its ways there is no way anyone can be bullish on the dollar. Therefore, I am a buyer of metals on a longer term basis. But I prefer to use my head and unless something happens over the next few days, I see no reason to change my mind.
One important note: I already have a healthy position in all metals and I am not a seller, I am just not committing new money at this time.