Tuesday, June 9, 2009

Dollar and Gold, Power Struggle Continues

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The U.S. dollar turned around overnight and is now testing the 80.00 level. Gold rebounded to 960 and silver to 15.30. Oil is back in the mid 69's. Media reports are stating that traders are questioning whether the dollar rise in the last few days was justified. Considering that there is no fundamental reason for it, for once the media might be right (don't get too excited, it's just a random coincidence). While fundamentals don't explain the recent action in the dollar, gold, silver and oil, technicals do. Gold, silver, and oil all hit important resistance levels. At the same time, the U.S. dollar hit an important support point. A reversal should be expected when these things happen.

The key question is how far will the counter moves go and for how long. At this point, it is not possible to say. It could be anywhere from a few days to several weeks. The price move may be minimal or to any of the Fibonacci retracements of the most recent rally for gold and silver or for the recent sell off of the trade-weighted dollar. Oil is somewhat different story and is trying to still wrap up its rally from 33 by going to the 75-78 range. It needs to break above 70.80 first. Once it does, the mid-70's should be inevitable.

It is amazing the dollar can't rally today again such extremely weak currencies as the pound. Not only do the British have a worse sub-prime crisis than the U.S and are engaging in quantitative easing as well, but prime minister Brown is in danger of being ousted from his post (on second thought, that may be one for the pound). Yet, the market is selling off the dollar against the pound. The Euro is rallying as well, even though Standards and Poor's recently downgraded Ireland's credit rating and German industrial production came in below expectations last night. As bad as things are in Britain and the Eurozone, the market is saying they are worse in the U.S. (personally, I think the market may be on to something).

We will know that gold and silver have won the game when the trade-weighted dollar falls below 78.33. Gold should break above 1000 right around that point and silver above 16. Expect the Fed and world's central bankers to keep weighing in on behalf of the dollar though. There is a G8 meeting this weekend and this will be the perfect opportunity for more pro-dollar PR cheerleading efforts. We will have to see if they can outdo Bernanke's threat or raising interest rates by the fall. If they do, they will likely be laughed off the world stage.

NEXT: Oil Gasses Up; Bear Bites Dollar

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.


Manoj said...

I am regular reader to your blog.
You recently said that you are accumulating UNG. What is the good entry point for UNG and what time period we should look for?

CJ said...

Speaking of laughter, I heard somewhere that Geithner got a few laughs from an audience in China after assuring them that "we believe in a strong dollar"...