Summary:
A weak dollar, strong gold, strong stocks (including gold stocks), and strong bonds -- what is wrong with this picture? Historically speaking, the bond/non-gold stock portion of this relationship is out of kilter with the dollar portion, but it is not likely to remain so indefinitely. And I continue to like gold, dislike the dollar, into the foreseeable future, if that tells you how I believe the balance will play out.

On 9/10, I published a missive expressing incremental optimism on gold and incremental bearishness on the dollar. On 10/18, I published another missive, affirming the optimism expressed in the earlier missive. Heres a look at how things have been going.

Between 9/10 and yesterday, physical gold was up 11.7% ($47/oz.), while the Dollar Index was down 6.3%, to 83.31. For the year to date through yesterday, the respective numbers came in at 7.9% and minus 4.2%, illustrating how important the last several weeks have been to the 2004 results for each.

But perhaps a surprise of sorts comes in how bullion's return this year stacks up against the non-gold portion of the equity market. Given the stock market's post-election rally, people might have the impression that stocks have done better than gold, which is not at all the case.

Between 9/10 and yesterday, the DJIA gained 1.7%. For 2004 through yesterday, the Dow was up a paltry 0.3%, although both figures exclude dividends.

There's no question that as a group, the Dow industrials have not been this year's stellar performers. But physical gold has performed just fine against the stronger proxies, too. For instance, for 2004 to date (through 11/22): Gold = +7.9%, the NASDAQ 100 = +6.8%, and the S&P 500 = +5.8% (excluding dividends). As to the 9/10 through yesterday period, the numbers came in at: Gold = +11.7%, NASDAQ = +11.0%, S&P = +4.7%.

Moreover, the recent strength in physical gold has precipitated a strong rally in the gold stocks, using the XAU as the proxy. Through 9/10, the XAU was down on the year, down a rather sizable 14.8%, at that. However, thanks to a gain of 18.9% between 9/10 and yesterday, the XAU moved into the black for the year, by 1.3%. (See also the table at the end of the text.)

Here are some excerpts from the 9/10 and 10/18 missives. From 9/10 ("A Lower Dollar, Higher Gold, Around the Corner?"):

"...The dollar's exchange-rate value, as measured by the Dollar Index, has done nothing, on balance, for the last few months. It has been range bound in roughly the 87.50 to 90 area, with a most recent close of just under 89.

"The fundamentals currently underpinning the dollar are not very healthy...In a world of genuine free markets, it is entirely reasonable to believe the dollar would stand at lower levels, probably significantly lower levels at that. But the mother of all carry trades, the mammoth absorption of dollars by foreign central banks, then the recycling of the dollars into US Treasury obligations, has kept the greenback well bid. I have a hunch, [however], the Dollar Index's trading range could be on the verge of widening [by virtue of lower levels].

"...Thanks again to carry trade considerations, the inverse relationship between the dollar's value and that of physical gold has been exceptionally tight. Thus, I would fully expect that if the dollar were only to revisit the bottom of the existing trading range, it would produce a sizable rally in gold. Particularly so, with a technical condition in gold that I assess as having gotten increasingly stronger."

From the missive dated 10/18 (also entitled, "US Dollar/Physical Gold Update"):

"On 7/20, in my 'Midyear Economic and Market Review,' I opined a value for physical gold of $475 to $500 by the end of the year. To achieve this range, bullion would have to rise about 13.4% to 19.3% by 12/31, which is certainly ambitious. Nevertheless, I continue to believe it is possible. Success hinges on the time and effort required to take out the formidable resistance that exists in the low $430s."

The "formidable resistance" in the low $430s did get taken out, helping materially pave the way to yesterday's close of about $449. In turn, this keeps quite alive, I would think, the possibility of $475 to $500 bullion by year-end. From yesterday's close, achieving $475 to $500 would require a further advance of 5.8% to 11.4%.

The recent NYSE debut of streetTRACKS Gold Shares has likely tacked a few dollars on the price of gold. And with bullion short-term overbought and approaching $450, the $450 level would appear to be a decent resting area. Nevertheless, continued meaningful weakness in the dollar's exchange-rate value over the near term will probably put some additional wind at gold's back.