Things have certainly moved on since I wrote last on the not so mighty US dollar. The breakout from the main trend of the dollar as shown below confirms that we are now in a higher degree upward move.
My Elliott Wave Analysis suggests we have finished the first main move down. The "first" main move down, I hear you ask? Certainly, this is not over if the Elliott wave count is right. We have had an impulse wave down from our top in 2001 down to December 2004. Note the 1-2-3-4-5 count and take further note that a correction cannot be an impulse wave. That implies we have just finished the first wave of a higher degree correction. That could be an A-B-C wave or a 1-2-3-4-5-impulse wave or something more complex.
Irrespective of that, the three confirmations of a major rally are the completion of the wave 1 or wave A (see bottom right corner), the breakout from the upper channel of our trend line and the breaching of the 65-week moving average. So, what do we see when we zoom in on this rally that has been in motion since late December?
The first thing to note is the upward move from late December to mid February that we label as the "W" wave. I had a good look at this little wave but could not see an impulse wave in it. What do I mean? I mean that if this were the start of a new dollar bull or a half-decent dollar rally, I would be looking for the bull/rally to get off to a blistering start with a 1-2-3-4-5 impulse wave. It does not; it starts with an A-B-C wave. This means that whatever this rally is, it is not going to amount to much. It may draw out in terms of time, but the odds of it retracing a lot of the previous bear are low at this point.
For this 5 months past, I went for the W-X-Y wave which one of the rarer forms of corrections, but this could change. I prefer to see a more common A-B-C wave, but that doesn't seem to be unfolding at this point.
Studies of similar historical corrective wave patterns suggest that this type of rally could correct 27% of the previous move. Since the dollar bear has progressed from 120 to about 80 that gives us a target of 91. The more traditional 38% fibonacci retracement common in many corrections gives us perhaps an upper limit of 95. So far, the rally has retraced a maximum of 20%.
In terms of time for this rally to work itself out, one may argue that the rally is already near completion (see chart of completion of Y wave) and so it is downwards once again. I would tend to disagree on that. We have just seen a 3.5-year down move; a 6-month rally constitutes 14% of that which doesn't look long enough to me. A look at historically similar moves suggests perhaps twice that which would draw out our rally to the end of this year or early in 2006.
Either way, we should expect the end of the first part of this rally soon and a mini-drop of the dollar into the 80s range for a month or two. So, how does this affect gold and silver? Below are the two corresponding charts for the two metals.
We can see that gold has been in a correction of its own within the same time frame of the dollar rally. The end of the gold correction is in sight however. The final C wave is in progress and can expect to complete this summer. The weakness of the dollar correction should ensure that gold will probably not correct much below it's A wave low of $410.
Silver has been even more impressive than gold. In fact, while the dollar has rallied from its December low, silver has risen from a low of about $6.30 to its present $7.50 range. Now that silver has broken out of its symmetric triangle, our second-choice Elliott wave interpretation (the contracting A-B-C-D-E triangle) takes precedence over our old one (see the (1), (2) and (3) annotations) which failed to breach the lower trend line twice.
What might be causing this silver resilience in the face of a dollar rally? Several things suggest themselves. It could be that the long expected draw down of stockpiles is now exerting real pressure on silver deliveries. Alternatively, we are now entering a traditionally strong time for silver prices. One final titbit is the rumour that someone is stockpiling the metal for a forthcoming silver ETF. What I do know and have recommended all along is that silver is a buy and hold whatever and averaging in one's silver purchases can smooth out such times of price uncertainty.
But what of the dollar's longer term fate? In December, we either finished a 3.5-year wave "A" or a wave "1" of a larger impulse wave. At this point in time, the two cannot be distinguished. If it is an "A" wave component of an A-B-C move, we could perhaps see the dollar index finishing no lower than 55 by the end of the decade if this current rally stops at 95.
If it is the more severe 1-2-3-4-5 wave, wherever it finishes below 55, it can only signal one thing, the end of the American Dollar as the reserve currency of the world. The New Era Investor newsletter will continue to track the dollar, silver and gold as we enter this interesting period.
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