You Can Get on the Gold Train and Ride the Dollar

Last Friday, I initiated a position in gold by shorting the Power Shares DB Gold Fund (DGL). As I will display, gold usually trades directly opposite the dollar. Consequently, one would believe I have a bullish position in the dollar ... but not exactly. Although I do believe the dollar is going to make a comeback, I am not ready to take a position here. Let me explain.

There were a few reasons floated by the mainstream for gold’s historic rise from $400 an ounce in 2005, to $1000 in 2008. Some of these reasons were valid, others not so much.

First, maybe gold was a little under priced ... maybe. Second, the fall of the dollar caused weary US investors to move money into gold as a natural hedge. Third, global demand is up with the rise of middle class through out the world.

All of these factors may be true, but do they justify gold’s exuberant prices? I don’t think so.

I would argue that some of the price increase must also be attributed to a little mania!

Last week I detailed why oil and oil service stocks were beginning a long term down trend. Today I will show you a long-term bearish trend in Gold and the beginning of a long-term bull trend in the dollar.

(The charts are going to get a little complex, but we'll build up to the really tough ones.)

Let's first take a look at any similarities between gold and the dollar. Below is the 25-year chart of gold and the dollar since 1983. They are almost identical opposites.

click to enlarge images

One can see clearly that, as the dollar declines, gold rises and vice versa.

Below is another 25-year chart. I have boxed out periods where the dollar has roared while gold hibernated and vice versa. Notice from 87 - 96 that both traded sideways. During the late 90’s the dollar soared with the economy. As the economy faltered in the new millennium we can see that the dollar's fall coincides with gold’s rise.

Ok, here’s where the charts get a little complicated, but don’t get nervous -- it’s easy. Below, we have a 6-month chart of gold and the dollar. The top indicator is the MACD. In the chart we have 50 and 200-day Exponential Moving Averages (in green, purple and blue). Finally, below the volume indicator we have the (RSI) Relative Strength. Everything else on the chart you do not have to worry about.

Again, over the past 6 months gold and the dollar are trading opposite. In the MACD, notice I circled the bearish signal when MACD crossed its moving average. The EMA shows all three moving averages just crossed over from below the trend line (support) to above the trend line (upward resistance) supporting a bearish trend. Further the 20-day crossed the 50, creating heavy downward pressure. The RSI is also showing a downward trend. The RSI is about 30, constituting oversold territory, meaning we may get a bullish bounce. Nevertheless, we can see the beginning of a bearish long-term trend. (Dollar chart analysis below charts.)

These technical factors mixed with unidentifiable fundamental support of gold’s evaluations leads me to believe that there is significant room on the downside. I just do not believe there is any valid reason for gold’s high prices. "The Chinese like gold" is not a valid argument.

(Above) We are starting to see the start of a long-term bullish trend in the dollar. The MACD has crossed its moving average displaying bullish momentum. The EMA 50 and 20-day have gone from above the dollar (resistance), to below the dollar (support). This newly found support will be the basis of a long-term bullish trend.

You maybe asking yourself, “if I am short gold, why would I not be investing in the dollar with all these technical indicators I am displaying?”

I have two reasons. First, gold and the dollar do not trade inversely 100% of the time, and sometimes there are lag times from one trend to another.

Second, I am not fully confident that the dollar is ready for a huge bull run. Like I have said, I believe gold’s price was artificially inflated on baseless claims and the dollar's fall. You want me to believe demand for gold is up 300% since 92? I do not believe that. Gold is not copper or steel. Gold has no value except jewelry and some industrial parts, but very little. There was no catastrophic invention consuming the world's gold supply. Cars are not going to run on gold.

The free-falling dollar caused nervous investors to look for a safe bet, and they found one in gold. Gold’s rise then created a buying frenzy, which has since slowed (more on this in a bit). A slowing economy mixed with high gas prices are causing consumers to cut back. The exuberant prices for gold are further alienating potential gold consumers. On the other hand, high gold prices are driving exploration and ultimately saturating the market by increasing supply.

The dollar, on the other hand, is down for fundamental reasons. Low interest rates, high debt, saturation of the dollar, a flailing US economy, and so forth. These are real reasons for the dollar's evaluations.

I believe the dollar is about to turn it around, if it hasn’t already. Nevertheless, I am just not ready to jump on board yet. Before I invest in the dollar I want to see some closure in the financial sector and housing market woes. I would also like to see an increase in consumer confidence. When a healthier picture of the US economy can be drawn, then I will be ready to invest in the dollar. I am not concerned with catching the bottom, but I am concerned about making a money-losing mistake.

Here’s how I would play it!

First, short gold.  I purchased the DGL Jan 09, 40 put options [DGLMN] at $8.60.

Below is the 1-year chart of the DGL Gold index. In the first rectangle when gold reached its highest level, the bulls and the bears had a fight. From the outcome we can see the bears won. Then they kept winning these little battles as gold continued to make lower highs through April, May and June. Then a fake rally in July, followed by a continuation of the long term trend. Notice also at gold’s height it was a frenzy, with crazy volume in May. Then slowly but surely gold and the volume continued to decline. It seems to me the buyers are drying up as sellers multiply.

Second, I am watching the dollar for further confirmation of a long-term bull trend. When the right time to buy presents itself I will purchase (UUP) Powershares DB US Dollar Bullish Fund.

Below is the 1-year chart of UUP. The dollar opposite of gold is looking good. First look at the volume. In May the volume coincides with heavy pressure on its base level at about 22.5. The bear found heavy resistance at this level over and over again. Every time that level was reached, the volume picked up and the bulls fought off the bear. The heavy volume was a warning shot that the bulls were on their way. In August the volume was heavy again, but this time the bulls broke out through heavy resistance

Still, I will wait for the dollar to build a strong base and continue its breakout pattern. Building the base I believe will take some time. I think the dollar still has some fundamental issues unlike gold that may keep it at this level for a little while longer.

The key with the trades I have been recommending is: don't try to find the top or bottom, but the middle area. The trick is to realize when something is way over or undervalued. Then when the reverse trend presents itself think, “do I believe this position will trade one way or another substantially over the next six months?” If my answer is yes, I will procede either long or short depending on where I believe the momentum is going. I am trying to find the profit in the middle of a bear or bull trend with significant room for profit.

This way I need not worry about top or bottom.

Comments

[chux08:]

Wow...another dollar worshiper who hasn't heard the printing presses running full time, 24/7 and inflation running along at over 10% who says the dollar should get stronger but he's not investing in dollars...yet. Some premise!
These dollar prognosticators...wher... do they find them?? I like this part too:

"You want me to believe demand for gold is up 300% since 92? I do not believe that. Gold is not copper or steel. Gold has no value except jewelry and some industrial parts, but very little. There was no catastrophic invention consuming the world's gold supply. Cars are not going to run on gold."

That's it...this guy's an anti-gold bug, if you can get your mind around that.
My advice? Repeat after me, GOLD IS REAL MONEY, paper dollars are fakes, GOLD IS REAL MONEY, dollars are fakes, gold is REAL MONEY, and the dollars in your pocket (as measures of wealth) are fakes. Thinking about gold and commodities together is obviously confusing (especially to dollar aficionados like the author) and should be avoided.

2008 Aug 15 04:33 AM

[Coelacanth:]

Chux08,

Did you fall hook line and sinker for Jim Rodger's advice to "dump the dollar and get long gold"? You do know he's been long gold for 10 years now right? How's his advice working out for you lately?

It's pretty clear you're not a trader. Did you really believe an over-valued euro was sustainable? How intense do you think images of people in emerging countries rioting over food prices had to be before there was the will to ease the pressure? Do you really believe there would be any airlines left in a year from now at $146.00 barrel oil?

What you're seeing is the pent-up capitulation of unsustainable global macro-economic imbalances. That's o.k. though.....I'm sure you've been "buying gold on dips" because you know all this nonsense about a stronger dollar will blow over eventually. Better to be right than to make money though right?

2008 Aug 15 05:29 AM

[dieuwer:]

All these dollar bulls, I love it!! Bottom in gold must be real' close. And puhhleezz, there was never been a buying frenzy nor exuberant.
If you wanna see a buying frenzy and exuberance, go make in movie of all the "hysterical people" in front of Apple stores!

For the record, I do expect the dollar index to go to 80.

2008 Aug 15 08:24 AM

[Kelly Liebe...:]

At what point do our printing presses need to roll out more dollars before we become Zimbabwe??? I guess somehow the United States is somehow immune to it all.... Print, charge, print, borrow, print and charge some more. if it works for our Government, our corporations and Institutions I guess it ought to work just fine for the rest of us!
Go buy yourself a top of the line scanner! Nobody seems to care!!!
Free-For-All!!

2008 Aug 15 09:17 AM

[xsuddensam:]

In which world does this writer live?

My God, how can any reasonable person believe that the dollar is going on an extended bull run?

Check out today's Seeking Alpha article:

seekingalpha.com/artic...

This is a must read!

2008 Aug 15 09:38 AM

[FoxV:]

Shorting gold two weeks before the time it traditionally rises (some times a lot) Nice timing. Find a dollar positive play if you wish, but betting on gold going down in September is pure folly.

All this talk of technicals, but no mention of why the USD has spiked (in a completely unnatural manner) recently. The ECB just went out and bought a wackload of USD. Why, Currency manipulation to give a cover for more interest rate cuts.

There are is so much bad paper out there, bank write downs are heading into the multi trillions (and this is without considering the derivatives fiasco). The Fed funds rate is going to 0%. Bernanke is going to throw the USD under the bus.

So ride the US Dollar at your own peril.

2008 Aug 15 09:56 AM

[xsuddensam:]

FoxV:

You are right on the money (heh, heh) about the dollar and gold.

It surely is a sign that portends terrible things when central banks are propping up an old, tired and shrinking dollar in order to save their own skins.

2008 Aug 15 10:28 AM

[oldgoldbug:]

The one thing that never made sense in all of this was the low interest rate on long Treasuries. Being from the old school I had to wonder why gold was up so much and Treasuries prices stayed strong. Now we have all kinds of up inflation numbers but the precious metals are plunging. Perhaps the Treasury market was right all along and the inflation was just a big blip on the radar. Or, perhaps the gold guys are right and what we are seeing now is a correction. If gold runs from about $250 to $1030, it is not unreasonable to see a correction from $1030 to a support range between $500 and $780. The $INDU on its way from 1000 to 14000 had a pretty nasty correction on one day in 1987 from 3000+/- to 1800+/-. Turned out to be both a good short side trade and a good day to go long term long. At the risk of talking out of both sides of my mouth I think the author and the gold bug commentators are likely to be right - short term down; long term up - probably up further than any of us can imagine right now.
PS You gotta sell at least a little gold and silver from time to time - Safeway doesn't take Eagles.........yet.

2008 Aug 15 10:36 AM

[dieuwer:]

I think a telling sign is that you cannot get physical gold or silver at current spot prices. "Premiums" are very high and increase with every drop in the spot price.

*I anyone can tell me where to buy physical silver at $13, I'm interested*

2008 Aug 15 11:21 AM

[rockingjude:]

Le Metropole Members,
>
> U.S. mint suspends gold coin sales; futures price is a fiction
>
> Submitted by cpowell on 09:27PM ET Thursday, August 14, 2008. Section: Daily Dispatches
> 12:25a ET Friday, August 15, 2008
>
> Dear Friend of GATA and Gold:
>
> The U.S. Mint has suspended sales of American Eagle gold coins and is refusing orders from dealers, two coin and bullion dealers confirmed Thursday.
>
> The mint's suspension of gold coin sales follows its tight rationing of sales of silver eagle coins, begun in May, when sales to the public were terminated and sales to the mint's 13 authorized dealers were tightly limited.
>
> Word of the mint's suspension of gold coin sales came from the American Precious Metals Exchange in Edmond, Oklahoma, (apmexdealer.blogspot.c...) and from Centennial Precious Metals in Denver, Colorado.
>
> The suspension is overwhelming evidence that the futures contract price of gold on the commodities exchanges is substantially below the physical market price and that, indeed, the commodities exchanges are being used as GATA long has maintained -- as part of a massive scheme of manipulation of the precious metals, currency, and bond markets.
>
> Michael Kosares, proprietor of Centennial Precious Metals and host of its Internet bulletin board, the USAGold Forum (www.usagold.com/cpmfor.../), explained Thursday:
>
> "The U.S. Mint buys direct from the refiners, and this suspension of gold eagle sales may be an indication that the supply line is already backing up, or that the mint expects that it will back up for the rest of the year. I wonder who would give up physical metal at these prices and under these circumstances except distressed sellers. The central banks are in a hunker-down mode as far as I can determine, and it's the mines that supply the refiners. So if the mint, which buys from the refiners, is having a difficult time locating metal, what does that tell you? I keep saying that we may get a surprising rubber-band effect later in the year when the pre-holiday/festival season kicks off in September/October. It may happen sooner. One of our indicators of approaching a bottom in gold is how many calls Centennial Precious Metals gets from our U.S.-based Indian clientele. Here's a quote from my office's report to me at the end of the day today: 'Today was a good day. ... There must have been an Indian convention where someone was handing out USAGold business cards.' That may give you a clue as to thinking in India proper and probably the rest of the Asian rim."
>
> That is, through their agents the bullion banks the Western central banks, desperate to prop up a corrupt and totteringt financial system, have put gold so much on sale that even the U.S. Mint can't find any now. The price reported from the commodities markets is a fiction -- a scary one, perhaps, but a fiction no less.
>
> You can strike a blow at the market riggers who are defrauding the world -- just buy a little real metal. The dealers listed at the bottom right of this dispatch will be glad to help you do it.
>
> CHRIS POWELL, Secretary/Treasurer
> Gold Anti-Trust Action Committee Inc.
>
> * * *
>
> Join GATA here:
>
> Hard Assets Investment Conference
> Tuesday-Wednesday, September 9-10, 2008
> Mandalay Bay Resort and Casino, Las Vegas, Nevada
> www.iiconf.com/
>
> Silver Summit
> Thursday-Friday, September 18-19, 2008
> Best Western Coeur d'Alene Inn
> Coeur d'Alene, Idaho
> thesilversummit.com/
>
> New Orleans Investment Conference
> Thursday-Monday, November 13-18, 2008
> New Orleans Marriott Hotel
> www.neworleansconferen.../
>
> * * *
>
> Help Keep GATA Going
>
> GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at www.gata.org/.
> Contact GATA
> [e-mail]
>
> Gold Anti-Trust Action Committee
> 7 Villa Louisa Road
> Manchester, Connecticut
> 06043-7541 USA
>
>
> www.gata.org/
>
>
> Recommended Sites

>
> Recommended Gold & Bullion Dealers
> Coin and precious metals dealers who have supported GATA
> and been recommended by our members:
>
> Blanchard & Co. Inc.
> 909 Poydras St., Suite 1900
> New Orleans, Louisiana 70112
> 888-413-4653
> www.blanchardonline.co.../
>
> Centennial Precious Metals
> Box 460009
> Denver, Colorado 80246-0009
> 1-800-869-5115
> www.usagold.com/
> Michael Kosares, Proprietor
> [e-mail]
>
> Colorado Gold
> 222 South 5th St.
> Montrose, Colorado 81401
> www.coloradogold.com/
> Don Stott, Proprietor
> 1-888-786-8822
> [e-mail]
>
> El Dorado Discount Gold
> 13014 North Dale Mabry Highway
> Suite 133
> Tampa, Florida 33618
> 623-643-8785
> www.eldoradogold.net/
> Contact: Eric Levenson
> [e-mail]
>
> Gold & Silver Investments Ltd.
> 63 Fitzwilliam Square
> Dublin 2, Ireland
> ...and
> Tower 42, Level 7
> 25 Old Broad St.
> London, EC2N 1HN
> United Kingdom
> Local Call Ireland: 1-850-GOLD-IE
> UK phone: [phone]
> International: [phone]
> Fax: [phone]
> www.gold.ie/
>
> GoldMoney
> Net Transactions Ltd.
> ASL House
> 12-14 David Place
> St. Helier, Jersey JE2 4TD
> Channel Islands, UK
> International: [phone]
> GoldMoney.com
>
> Investment Rarities Inc.
> 7850 Metro Parkway
> Minneapolis, Minnesota 55425
> www.gloomdoom.com/
> Greg Westgaard, Sales Manager
> 1-800-328-1860, Ext. 8889
> gwestgaard@investmentr...
>
> Jaxville Gold and Silver Trading Co.
> 4901-48 St.
> Parkland Square, Lower Mall
> Red Deer, Alberta, Canada
> www.jaxville.com/
> Jack Fortin, Owner and Operator
> 403-346-5266
> [e-mail]
>
> Kitco
> 178 West Service Road
> Champlain, N.Y. 12919
> Toll Free:1-877-775-4826
> Fax: [phone]
> ...and
> 620 Cathcart, Suite 900
> Montreal, Quebec H3B 1M1
> Canada
> Toll-free:1-800-363-70...
> Fax: [phone]
> www.kitco.com/
>
> Lee Certified Coins
> P.O. Box 1045
> 454 Daniel Webster Highway
> Merrimack, New Hampshire 03054
> www.certifiedcoins.com/
> Ed Lee, Proprietor
> 1-800-835-6000
> [e-mail]
>
> MRCS Canada
> 12303-118 Ave. NW
> Edmonton, Alberta T5L 2K2
> Canada
> www.mrcscanada.com/
> Michael Riedel, Proprietor
> 1-877-TRY-MRCS
> 1-877-879-6727
> [e-mail]
>
> Miles Franklin Ltd.
> 1001 Twelve Oaks Center Drive
> Suite 1028
> Wayzata, MN 55391
> 1-800-822-8080
> www.milesfranklin.com/
> Contacts: David Schectman,
> Andy Schectman, and Bob Sichel
>
> Missouri Coin Co.
> 11742 Manchester Road
> St. Louis, MO 63131-4614
> [e-mail]
> 314-965-9797
> 1-800-280-9797
> www.mocoin.com/
>
> Resource Consultants Inc.
> 6139 South Rural Road
> Suite 103
> Tempe, Arizona 85283-2929
> Pat Gorman, Proprietor
> 1-800-494-4149, 480-820-5877
> [e-mail]
> www.buysilvernow.com/
>
> Silver Trading Co.
> 445 Montgomery St.
> PO Box 876
> Shreveport, Louisiana 71107
> Larry LaBorde, Proprietor
> 318-470-7291
> LLaBord@silvertrading....
> www.silvertrading.net/
>
> Swiss America Trading Corp.
> 15018 North Tatum Blvd.
> Phoenix, Arizona 85032
> www.swissamerica.com/
> Dr. Fred I. Goldstein, Senior Broker
> 1-800-BUY-COIN
> FiGoldstein@swissameri...
>
> The Moneychanger
> Box 178
> Westpoint, Tennessee 38486
> www.the-moneychanger.c.../
> Franklin Sanders
> 1-888-218-9226, 931-766-6066

2008 Aug 15 12:05 PM

[FoxV:]

And add to that, the US mint just suspend Gold Eagle sales. (won't provide a link because every time I do, by post gets yanked)

So first Silver, now Gold Eagles. hmm, raises many questions doesn't it. But I'll side step those and just mention, we now have crashing prices coinciding with shortages.

This is what is known as a "Back up the truck" signal. Don't wait too long to bottom feed. The snap back from this dollar foolishness is going to be astounding.

2008 Aug 15 12:15 PM

[whidbey:]

Interesting, but too complicated which suggests you don't seem to have a good fundamental understanding the role of dollar v. metals. The dollar has a future but not as a reserve currency for long. I think we have no choice other than PM if we want to survive. In the meanwhile you will be attempting to discern whether PM or dollar is make "relative" headway. Look at what each will buy instead.

2008 Aug 15 05:57 PM

[ctrout:]

Sorry John, you missed the boat on this one.

I have no problem going long the dollar against other currencies based on the charts but you will get murdered shorting gold against the U.S. dollar long term.

As a day trader, I have no problem going any direction as long as myur eyes are on the charts. However, you have just missed the whole point of gold as a store of value for thousands of years.

I would love nothing more than to see gold get crushed.......so I could buy more at favorable prices. Besides if you follow gold and gold miners they tend to make short term bottoms in late summer to early fall.

2008 Aug 15 08:38 PM

[Rhett:]

This dollar-pusher is off-the-wall! His advice defies gravity.

2008 Aug 16 04:59 PM