As I write this this morning the US dollar index is trading down .77 at 83.67 and gold is trading up over 7 points and is above its most recent high. On Wednesday the dollar broke through its support trendline that goes all the way back to last December. The trend is now clearly down for the dollar and the dollar should fall down to 80 within the next 6 months.

Today is tricky though because the US commodities markets are closed. Volume is going to be extremely thin in the gold market. Gold stocks are going to gap up, but I'm still to wary to add to my positions as I'm already about 90% invested. Plus the charts still suggest that gold stocks are due for some more consolidation as I wrote here: XAU Price Projection for the Next Three Weeks - Mike Swanson (11/22/06)

I want to add on to my position by buying the GDX ETF and several of the larger cap gold stocks. If somehow I miss a big breakout and change my mind about the likelihood for more consolidation and sideways action then I'll have to adjust my strategy by buying some of the smaller stocks that haven't broken out yet instead. But we'll see what happens. I still think it most likely that we'll see some more consolidation next week. Gold may breakout and the stocks fail too, which would be a big negative divergence - I'd have to position myself differently if that happens too. So we can make projections right now and draw out different scenarios, but we are going to have to see what the market does for the next few days to get a better handle on things.

One thing is clear though, the dollar is starting a new leg down. Everyone knows that economic growth is going to slow in 2007 because of a weaker housing market. Bush's economic advisers said in their semi-annual forecast, which is a political document just like everything else that comes out of the White House. They see gross domestic product increasing 2.9 percent next year, which is slower than the 3.6 percent forecast in June. Initial jobless claims increased by 12,000 to 321,000 in the week that ended Nov. 18 from the prior week's revised 309,000, the Labor Department said today in Washington. The four-week moving average, a less volatile measure, rose to 317,000 from 314,000.

Something is going on. Federal Reserve Chairman is heading to China on an emergecy trip to talk about the deficit and dollar. According to CNN.COM:

"Treasury Secretary Henry Paulson will travel to China with Federal Reserve chairman Ben S. Bernanke and other cabinet members in mid-December to make the case for economic policy changes, according to a report in the New York Times."

"China's export-based economy is closed to most outside investment while its weak currency makes its exports more attractive on the international market, the Times said. In addition, its record of lax piracy law enforcement and intellectual property have been a source of concern for the administration and Congress."

"Although U.S. Treasury secretaries and Federal Reserve chairman have met with their Chinese counterparts before, Bernanke's inclusion in the upcoming meeting is meant to send a signal of the seriousness of the issues, the Times reported."

"Bernanke is expected to make the point that the United States' reliance on China as a buyer of its debt is not sustainable, a position he and other central bankers have taken before. "

It's probably too late. Something should have been done several years ago.

The most important thing we can watch though is the Fed fund futures, which are pricing in a 40% chance of an interest rate cut in March. They were only pricing in a 17% chance two weeks ago.