Monday, October 24, 2011

Challenging Conventional Assumptions

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There are many old adages in the market that are like stereotypes: they may work more often than not, but there are enough exceptions to make them dangerous when applied blindly. I have been reading commentators talking about the US Dollar and how the Commitment of Traders is extremely bearish because the "commercials" are bearish on the US Dollar and they are the "smart" money. But are these insiders the smart money for all of the different futures contracts and are they usually right? Of course not.

When it comes to the US Dollar (and, by implication, the Euro), the commercials have a terrible history when it comes to predicting the intermediate-term trend and have more often than not been dead wrong over the past 5 years or so!

Let me show you a chart stolen from to show you what I mean. This is a weekly chart of the US Dollar over the past 5 years or so thru part of today's action with my comments:

So, is the US Dollar about to collapse against other paper currencies or will recent history repeat and the US Dollar move higher from here? I think the latter.

This doesn't mean Gold (and silver) can't rise, as all paper currencies are sinking relative to Gold and will continue to do so until the Dow to Gold ratio hits 2 (and we may go below 1 this cycle). However, this may have implications for favoring Gold stocks over Gold once we hit bottom.

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