Sunday, December 13, 2009
The U.S. Dollar Rally and Gold
The "Dollar Up, Gold Down" crowd is predicting a collapse in the Gold price now that the U.S. Dollar has finally begun to have a little rally. Here's a 2 year daily chart to show the action in the U.S. Dollar Index ($USD) using a candlestick plot thru Friday's close:
The only thing that is surprising to me on this Dollar rally is how long it took to develop. I thought it was going to start this summer. Gold bulls need to remember that it is not just the U.S. Dollar that is in trouble. Those calling for the imminent collapse of the Dollar need to remember that the British Pound would be much more likely to collapse first. For all paper currencies are sinking right now at different rates. This is the usual state of affairs in an anchorless currency system.
The difference is that this is the first time such a dangerous experiment is being tried on a global basis. The other issue is the reserve currency status of the U.S. Dollar, which gives it an advantage over other currencies. As a Gold bull, I don't fear a Dollar rally and as someone who gets paid in Dollars, it doesn't bother me at all! We could easily reach the 200 day moving average on this rally and it wouldn't stop the Gold bull at all.
I believe Gold will go through whatever correction it was going to have anyway above its new $1000/oz. floor. The U.S. Dollar Index is a measure of value relative to other paper currencies. To say the Dollar can't rally some against the Pound, the Yen or the Euro is silly in my opinion. But all of these currencies are falling relative to Gold and will continue to do so until the secular Gold bull market is over. To say that Gold can't rise while the U.S. Dollar is rising is to ignore many relevant historical periods even during the past few years.
I don't think going long the U.S. Dollar for a scalp trade or hedge against one's Gold holdings is unreasonable, but I don't trade currencies personally and I already get paid and transact in U.S. Dollars (i.e. my long Dollar position is rather high because I live and work in the U.S.).
Gold is doing what all bull markets do - taking a rest to re-charge and get ready for the next leg higher. Gold can rise when the Dollar does. Gold can rise when the stock market is rising, flat or falling. Central banks are now net buyers of physical Gold (first time in decades). Do you think central banks are the dumb money in the markets or do you think maybe they know what's coming next since they are the ultimate insiders? I am greedy at current Gold price levels, not fearful.
I think 2010 is going to be a bonanza-grade year for Gold and Gold stocks. Many traders and investors don't like corrections - they can be boring, create uncertainty and/or fear and require patience. For me, every correction is an opportunity to continue accumulating. Many Gold stocks held up well late last week. I even had a nice upside surprise on Rainy River (ticker: RR.V), which I am going to hold onto despite its overbought status here:
Other junior Gold miner charts that look good to me also seem to be ignoring the Gold price action fairly well over the past 1-2 weeks. I am not advocating these stocks, though I do own all of them and some I have been accumulating more at current levels:
Paramount Gold and Silver (ticker: PZG):
Tanzanian Royalty (ticker: TRE):
Great Basin Gold (ticker: GBG):
Richmont Mines (ticker: RIC):
These are all stocks that have handled the Gold price correction "calmly" (or ignored the Gold correction altogether) are not even close to being overbought (and some are oversold) and are at good buy points technically right now. This allows not only a good entry point, but also makes it easy to set a stop loss point to minimize risk. I am not a mining expert and cannot reliably comment on the fundamentals for any of these companies. But these are just a few examples of great-looking junior Gold stock charts that I think are set to break out to the upside sooner rather than later.
I remain wildly and rabidly bullish on the Gold patch at current levels, even though this Gold and Gold stock correction may require further time and price to complete (not sure and there are no guarantees when speculating on the short term).