The Dollar, Gold, Oil and Bonds
"To recognize an opportunity and use it is the difference between success and failure." ~ Author Unknown
The dollar came within striking distance of our first target 90 and it's still possible it could hit the higher targets which fall in the 93-96 ranges.
The dollar is now due for what appears to be a strong correction and if this correction gathers more steam it could result in a resumption of the dollars down trend. The Feds have been creating money at a mind boggling rate and at some point in time this money is going to filter out from the banks into Main Street, and then the pains of inflation will be felt. From a mass psychology perspective too many people are buying dollars; once again they are doing this by selling out their positions and holding cash. Individuals think the safe way to go now is to hold cash; whenever the majority start to do something, it indicates a long term trend change is about to occur. Market update Nov 25, 2008.
The dollar today traded below 85.50 another important key price point and as such it indicates that the correction is gathering steam. During this corrective phase the Dollar should not trade below the 83.70-84.00 ranges for more than 6 days, for if it does, the next target will be 81. After hitting 81, it should mount a rally and at least test the 83.00 ranges before pulling back; if it is unable to do this then the next target becomes 78. The dollar could potentially trade all the way down to 75 and there would still be a chance for it put in a new high. If however it trades below 75 for 3 days in row, then one has to seriously start considering the possibility that the dollar might have topped and is now about to resume its downward journey.
We were one of the first to turn bullish on the dollar, but even then we stated this rally would not last forever and the close below 85.50 is the first signal that a top in the dollar might have already been set. Ultimately whether it mounts another rally or not, the dollar will resume it long term down trend and go on to put in new lows sometime in 2009, before a more permanent bottom takes hold. If it mounts a secondary rally, the downward trend will only be delayed but not altered.
If it trades below 63 for more than 3 days in a row, the next target will be a test of 54. Market update, Nov 4, 2008
Oil has now hit almost all its normal targets we are now entering into the extreme target ranges. Oil traded below 54, tested 51 and it had to trade above 54 within 3 days of testing 51; instead it traded below 51 and in doing so has now triggered the possibility of testing the 45 mark. Market update Nov 25, 2008
Oil traded as low as 40.50 before mounting a relief rally; as the oil market is now extremely oversold, it is only natural to expect some sort of rally. The current rally is going to run into resistance at 48 and if it can trade above this zone for 3 days in a row, it will have a very good chance of trading up to the 56 ranges. Ultimately oil will most likely test its lows before a long term bottom is in place.
On the other hand Oil should not trade below 39.00-40.10 ranges for more than a few days in a row. This zone initially provided years and year's worth of resistance and once overcome, this zone of resistance turned into a fortress of support. Thus a break below such a strong zone of support would not bode well for the oil market and could trigger a test of 28.00.
Very Short term trend= bullish; a strong positive divergence signal was flashed so gold could trade up all the way to 840 before pulling back. Nov 4, market update 2008.
Gold came within striking distance of hitting 840 as it traded as high as 832 on Thursday before pulling back.
Since issuing the 840 target on the 4th of November, we subsequently issued higher targets for gold; gold had the potential of trading as high as 930 but as it has taken so long to rally strongly, the upside targets have been lowered a bit.
The picture weakened after gold broke out towards the end of November, rallied all the way to 830 and then broke down and traded as low as 740 before stabilising. The current upside targets are 870-900; in order to get these ranges, Gold will need to trade past 810 once again and after doing so it should not trade below 780 on a closing basis. It should also trade above 780 for at least 9 days in a row. After the 870-900 ranges are tested, Gold will probably mount one final correction, which should take it to the 720 ranges; a break below this for more than 7-9 days will result in a test of the 650 ranges. The next correction should provide the basis for a long term bottom and gold will probably rally all the way to 1200 before correcting again.
Other interesting points
The Arab world especially is deploying huge amounts of money into Gold bullion. If they were worried about deflation should they not be doing the opposite?
The Feds are so terrified of deflation that they are willing to do anything to prevent it, even risk hyper inflation in order to knock deflation out; they are not just inflating the money supply now, they are actually hyper inflating it. The reason inflationary pressures are not hitting the world right now is because central bankers are holding onto this money instead of lending it; sooner or later they will go back to the only thing they know and that's lending money.
From a long term perspective holding onto large amounts of cash is going to be a very dangerous investment. On the same token we are not advocating that one should run out and dump all their money into the market or into gold right now. We will be approaching a point in time where it will make more sense to invest one's money ( in select stocks, Silver bullion, Gold bullion, etc) than hold large amounts of cash, for cash will one day start loosing its value at an alarming rate. We will do our best to advise our subscribers of this huge change that will hit the investment world in the not too distant future. We still think from a long term perspective stocks are selling at prices that will most likely never been seen for decades to come and that commodities bull still has a long way to go before anyone can start predicting its demise.
We addressed this issue briefly two weeks ago; the higher bonds trade without mounting some sort of correction, the more severe the eventual correction will be. We had the same view on the oil markets and the correction it mounted indeed is now beyond words; granted the correction jumped from severe to the unimaginable due to the current credit crisis that has hit anything and everything, but even if oil had only corrected to 75, such a target would have seemed ludicrous 6 months ago.
The current action in the bond market is normally one that precedes a top; in a few weeks bonds have mounted a spectacular rally and at the very least are due for a rather strong pull back. Investors are jumping into treasury notes and bond at such a rate that one would think the Dow was going to drop to zero; they are willing to earn almost nothing for the illusion of safety. In under 30 trading days bond have surged over 22 points, a gain of almost 20%; this massive surge is unprecedented on two fronts, one in terms of speed and the second in terms of the actual depth of the move.
To put this move into perspective consider the following; around April of 2003, the Feds were once again huffing and puffing about deflation. Bonds suddenly mounted a massive rally (very similar to the current one) and they tacked on roughly 13 points for a gain of roughly 12% in 3 months.
The move from April 2003 to June 2003 pales in companion to the current move; the current move (illustrated below) is almost vertical and looks monstrous compared to the one above. The yield on the 10 year note has moved from 4.023 (Oct 14) to a current low of roughly 2.6% (Dec 4) in roughly 7 weeks and it has left treasuries at levels not since the 1950's.
Charts provided courtesy of www.prophetfinance.com
When one looks at the first chart and then at the second chart, one gets glimpse of just how dramatic the current move really is. History clearly indicates that when the masses stampede the end result is always negative.
In 2003 after the brief rally that lasted roughly 3 months, bonds mounted a very strong correction, surrendered all the gains in less than 2 months and went on to put in new lows. Will the same thing occur again? We think there is a strong chance that this pattern will manifest itself again, it might not occur at the same pace as we are now dealing with levels of mass hysteria that are almost unprecedented in nature, but once the masses snap out of their fear induced stupor, expect bonds to mount a very hard correction. Note that when bonds rally, interest rates drop and vice versa.
"You need an infinite stretch of time ahead of you to start to think, infinite energy to make the smallest decision. The world is getting denser. The immense number of useless projects is bewildering. Too many things have to be put in to balance up an uncertain scale. You can't disappear anymore. You die in a state of total indecision." ~ Jean Baudrillard, French Postmodern Philosopher, Writer