Something is clearly out of whack. Gold has failed to push higher against the backdrop of a lower U.S. dollar for the first time in over a decade and, with pressure on the dollar increasing, the failure of support could ignite a massive decline. Is gold preparing to launch this time?
So says Jason Hamlin (goldstockbull.com) in edited excerpts from his original article* entitled Gold Preparing To Launch As U.S. Dollar Drops To Key Support.
The following article is presented by Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and the FREE Market Intelligence Report newsletter (sample here) and and has been edited, abridged and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.
Hamlin goes on to say in further edited excerpts:
The US Dollar Index
The US Dollar Index has put in a series of higher lows over the past few years, showing strength against other currencies, but has fallen to critical support around the 80 level. While these tests of support are typically spaced out by several months, this will be the second test of support in the past month. Pressure on the U.S. dollar appears to be increasing and failure of support could ignite a massive decline.
Gold vs. the US Dollar Index
Looking back to the start of the gold bull market, we see that gold and the dollar have maintained a fairly consistent inverse relationship. When the dollar moved up, gold moved down. When the dollar fell, gold pushed higher. The only major exceptions were 2005 and early 2010, when gold and the dollar moved higher in lockstep.
It is interesting to note that over the first 12 years on this chart, there was never been a prolonged period where gold and the dollar dropped together. This has changed over the past year.
When we zoom in on the chart, we can see a new anomaly in boxes 1, 2 and 3, whereby the gold price has been dropping alongside the dollar, rather than rallying. If we add together gold’s losses in these three boxes, we get a decline of nearly $300, despite a weakening of the U.S. dollar. Something is clearly out of whack as gold has failed to push higher against the backdrop of a lower dollar for the first time in over a decade.
Lastly, in box 4 we can see gold rising alongside the U.S. dollar for the first time since 2010. When combining these time periods, gold and the USD have actually had a positive correlation for a good part of the past 18 months.
Conditions Look Favorable for a Major Drop in the Value of the U.S. Dollar
I believe the anomaly is due to increased manipulation and use of HFT algos in the precious metals market. I don’t suspect that the positive correlation will persist, especially with the increasing spotlight on gold price manipulation. Additionally, fundamental conditions are becoming increasingly favorable for a major drop in the value of the U.S. dollar.
There is a growing movement to dump U.S. dollars in global trade in favor of local currencies or even gold.
- Russia and China appear to be spearheading these efforts, with new bilateral trade deals that bypass the U.S. dollar and additional agreements with BRICS nations to use Rubles or local currencies.
- Russia has also set up agreements to purchase oil from Iran with Rubles, Yuan or even gold.
- Central banks are increasingly replacing dollar reserves with Yuan reserves and
- the increased spotlight on the manipulation in the gold market could hamper the ability of the United States to continue propping up the dollar.
The above developments are all very bearish for the U.S dollar, whose days as world reserve currency appear to be numbered. Given:
- the debt levels of the U.S. government,
- unprecedented money printing to bail out the banks and keep the economy afloat over the past 5 years and
- growing distrust and distaste for the U.S. following the NSA revelations,
one has to wonder if the whole house of cards could come crumbling down sometime soon.
Gold Could Be the Major Benefactor of a Major Decline in the U.S. Dollar
Gold has been the major benefactor, up roughly 10% year to date. The technical chart has turned bullish, with gold breaking through long-term resistance in February. It put in a rough double bottom, followed by outlines of a cup and handle pattern, both bullish indicators. The RSI is pointing higher with room to run and I expect gold will be above $1,500 within the next few months.
With the stock market looking to be in the midst of a major crash, precious metals would seem the obvious buy at the moment. Gold is one of the only asset classes that does not appear overheated and wildly overvalued at current levels. Whether the dollar collapses suddenly or dies a slow death, you will want to have gold and silver in your portfolio to protect your wealth.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://www.goldstockbull.com/articles/dollar-drops-key-support/ (Copyright © 2014 Gold Stock Bull – All Rights Reserved; If you would like to receive my monthly contrarian newsletter, which covers precious metals, agriculture, energy, emerging technologies and so much more, please click here to subscribe.)
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