U.S. Dollar: In Danger As Reserve Currency.

Corporate American Sweating Regulation As Capital Finds Home Elsewhere

The U.S. Dollar is nearing a multi-year low, as measured by the Dollar Index. The common wisdom suggests that the status of the dollar is based on economic fundamentals. Yet, there is data that suggests that beyond the slowing economy, the long term trend and the increasingly dangerous of the dollar is stemming from policy decisions made by Congress and by the White House.

According to Investor's Business Daily: "a growing chorus of officials and executives are howling that the U.S. is losing ground to more nimble markets like London and Hong Kong." Indeed "After decades out front, a report says the U.S. hobbled itself with overly strict regulation while the spread of globalization and technology helped the rest of the field play a stellar game of catch-up."

Two years ago this week a surprisingly controversial event occurred in the gold world. The first gold exchange-traded fund to trade in the States was launched. The StreetTracks Gold Shares gold ETF marked the dawn of a new era where investors can now directly buy a gold proxy from within their familiar stock trading accounts.

The November 18th, 2004 launch of GLD galvanized long-time gold investors like few other events I can remember. Hardcore gold investors have long believed in holding physical gold in their own immediate possessions, which is definitely very prudent. All portfolios ought to have a foundation of physical gold, the real deal, in their owners’ own immediate possessions. Among these faithful gold investors, GLD spawned a schism.

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 get asked investment questions all of the time. Most want to know what stocks I like, but some want to know how I pick and choose them. They want to learn how to fish for themselves. Well, to catch the right stocks you need the right equipment and for me that means Telechart TC2007. There’s a reason that it is the most popular stock market software on the market right now and is used by people from all walks of life – from housewives to hedge fund managers with billions of dollars at stake.

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Since its latest interim low back in early October, gold has been rallying nicely.  In the six weeks since then the Ancient Metal of Kings is up 13%.  This is an impressive move by any standard, and it utterly dwarfs the much-hyped Dow 30’s 2% run higher into nominal record territory over this same period of time.
 
While gold certainly needed to correct and consolidate a bit after its incredible greed-laden surge that climaxed in May, gold’s current strength is not just a consequence of that necessary consolidation running its course in order to bleed rampant greed out of the metal.  Although the maturing of gold’s consolidation is almost certainly the primary factor behind gold’s recent interim low and subsequent strength, a fascinating secondary factor also exists.

The US dollar closed below its 85 dollar support level on Friday as the bounce in the dollar which began in June has fallen apart. We should see the dollar go down to its June lows over the next few months.

The long-term picture is getting more bullish than ever. However, in the short-term, gold stocks are likely to consolidate and base before moving substantially higher. Gold stocks tend to lead the metal so it is bullish when the XAU/gold and HUI/gold ratios trend higher. It means the gold stocks are rallying at a faster rate than gold. But, last week as gold stocks made a new high for the month, these ratios did not make a new high. We saw a similar non-confirmation in September when the XAU and HUI made false breakouts before entering a quick correction.

THE VALUE OF TECHNICAL ANALYSIS

Part of the October 21, 2006 “Big Picture� internet broadcast transcription spoke to technical analysis and technicians in a manner that gave this technician some pause to consider and speak critically to some of the points that were made. My purpose tonight is to provide some context toward the value or lack thereof of technical analysis. As a successful investor with roots as a value investor, there is value in technical analysis – especially in today’s market, which is especially short on actual value.

“JIM: Well, let’s take for example, technical analysis – let’s take reading the charts. What I find with technical analysis is that an investor can interpret charts almost anyway he wishes. So, for example, you can read the formations just about any probable result you would hope for. For example, if you’re bullish at heart on the market, you are more likely to interpret the charts optimistically. If you’re bearish you’re more prone to see bearish patterns in the charts.… Well, with all due respect to technicians, I firmly believe that technical analysis will never completely enable people to overcome their inherent traits of –once again – their emotions: hope, greed, pride of an opinion, and similar human feelings that we see that make successful investing one of the most difficult to master...And a lot of times simply what the charts are telling you is sometimes that consensus of opinion, but other times you can interpret charts in so many different ways. That’s why I tend to rely more on fundamentals on the reasons I base my investment decisions.�

I continue to see articles suggesting that the 4-year cycle low occurred back at the June/July low. Recently I was even sent an article, suggesting that there isn’t a 4-year cycle in the market at all. Yet, others proclaim that the 4-year cycle used to exist, but that it is no longer a relevant factor. It is my belief that most everyone that is even aware of the 4-year cycle was looking for the low to occur in October. After all, we all know that’s when the major lows and especially 4-year cycle lows occur, right? Just look at 2002. That 4-year cycle low came in October. The 1987 4-year cycle low came in October as well. Hey, the bear market low in 1974 also occurred with the 4-year cycle low in October. Man, this cycles stuff is easy. All we have to do is count out so many time units and there you are. So, if it didn’t happen in October, it must be that the 4-year cycle is no longer applicable, right?

Yesterday morning I told you that I thought the Nasdaq would try to put on a short-lived bounce. It fell in the morning and then traded up into the close, causing its 60 minute stochastics to give a buy signal. This morning as I write this Nasdaq futures are up ahead of the release of the employment report. All the Nasdaq needs to do is to move above yesterday's intraday high in order to confirm the stochastics buy signal.

The job reports will be key here. All of a sudden it seems people are getting worried about the economy. A good report should bring a bounce. According to Reuters:

Yesterday the Nasdaq fell over 32 points as the commerce department released data showing that construction spending fell .3% in September while the Institute for Supply Management Index came in weaker than expected. At least those are the news items the press is focusing on to explain yesterday's drop in the market. They are pointing to evidence of a slowing economy and fretting over whether the Fed will act in time top stop it.

Bad news or good news the markets are due for a pullback. They've been going straight up for weeks and are now extremely overbought: