Oct. 5, 07 - The US Dollar and Gold at critical levels.
The US Dollar index is testing all time lows as the Fed starts easing short term rates, raising the possibility of a panic decline before year end to finalize the 4 year cycle low in the US Dollar. The Current Account Balance suggests more devaluation in the future for the USD, but we are likely to see a repeat of the 1985 to 1990's decline and see another rally in 2008-09 before that occurs. How much the USD declines before that occurs is a guess, but a 10-20% decline should generate the fear necessary for a four year cycle low. Precious Metals are already sensing this possible scenario, with Gold breaking out, Platinum at all time highs, and Gold stocks also pushing higher. While Commitment of Traders (COT) sentiment for Gold is suggesting caution, it was also saying the same thing back in Oct. 05, before the huge rally in Gold that ended in May 06. COT sentiment for other precious metals like Silver, Platinum and Palladium are actually suggesting the rally is just starting.The Fed started to cut aggressively
After the initial August 2006 pause suggested the 6 year cycle in short term rates was cresting, the aggressive Fed rate cut of September 2007 fully confirmed it. This suggests that the housing credit crunch will spread, forcing the Fed to further cut rates until late 2009 or 2010 near the next 4 year cycle low.
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com
The US Dollar is tracking the 1985 decline
The US Dollar is on track to repeat a slightly smaller version of the 1985 to early 1990's decline heading into its 4.25 year cycle low in late 2007. Since all the major lows in the USD were made after a minimum 2 to 3 months of continuous declines, it is unlikely that the September decline was enough, and it could easily extend into November or December before a low is made.
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com
How low could the US Dollar go?
The US Dollar index is weighted to the Euro, Yen, Pound and Canadian dollar in that order, and a chart of the Current Account Balance shows that Asia and Europe are the biggest supporters of the US economy. Over the long term this situation can only correct itself through US Dollar devaluation, and respective appreciation of Asian and other currencies. In Europe the situation is more mixed with Germany offsetting drains from the Spanish and French economies. Resource rich Russia and Saudi Arabia, may also help mitigate the outflows from the British currency. All of the long term charts below are suggesting that the US Dollar will eventually lose another 50% of its value by the next 4.25 year cycle lows in 2012 or late 2016. However as we are approaching the 4.25 year cycle low, we find the Euro near all time highs of 145-150, the Pound near the 2.00 level and the Candian dollar near parity suggesting a change of trend in the near future. We should be on the lookout for a spike down in the US Dollar before year end to finalize this 4 year cycle low. With so many currencies close to multi year key levels, it will probably not be that deep, maybe 10-20%, but it should be fast enough to generate the fear necessary for a multi year low.
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com
Precious Metals are breaking out
Gold broke above the May 2006 highs bringing the all time highs within range, while Platinum is already making all time highs. Silver and Palladium are not far behind and all the cycles seem to be favorable well into 2008 suggesting a late 2007 Precious Metals rally.Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com
All cycle lows are favorable for Gold and Silver stocks
The Gold and Silver indexes turned up sharply from their cycle lows suggesting we are to see higher prices ahead. Since cycles of 1.1, 2.5 and even 6 years are cresting in early 2008, the next 6 to 18 months could move up rather sharply.Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com
Commitment of Traders can support higher prices
While the Gold COT's could be considered extended and suggesting caution, the Silver COT's are telling us that this rally could extend much further. Maybe the gains in Silver will be much bigger than in Gold. Palladium and Platinum COT's (not shown) are also suggesting much more to this rally, especially in the case of Palladium.Charts courtesy of Floyd Upperman Associates
Gold COT
Silver COT
Charts courtesy of Floyd Upperman Associates
The XAU to Gold ratio suggests higher prices
The XAU to Gold ratio is a well known sentiment indicator for mining stocks, and despite the sharp run in Gold and mining stocks it failed to reach previous levels of optimism in 2002 normally seen near 6 year cycle highs. It is likely to do so before the next cycle high in 2008 and that could mean large gains ahead in Gold and Silver stocks. The HUI to XAU ratio still lags and should turn up soon if the obvious Elliott Wave count of the HUI to Gold ratio is correct. So far the action of the HUI to Gold ratio is promising, but has yet to confirm the breakout.Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com
Cycles are favorable for Gold in the rest of the world
Looking at the price of Gold in major currencies, we can see that they are all headed for a 6 year cycle high in early 2008, suggesting a major US Gold high in early 2008. Future gains in other currencies may be limited, since any further decline in the US Dollar will keep the Price of Gold in other currencies lower.Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com