David's Trade Journal

[david_3011]

David's Weekly Market Chartmentary June 19, 2005

....................................................
NOTICE: I'm sorry about the missing images on some of my previous Weekly Chartmentaries. I had to do some house cleaning on my website folders. Too bad we can't re-edit the post after the initial 15 minutes. Please visit my website for these Weekly Chartmentaries. Thank you.
....................................................

The Dollar Just Happened To Be There

A week ago when gold spot price was still trading below $425, a large fund manager bought 12,000 August $445 gold calls for $200 each. For an "out of the money" strike, this is a large trade. A day later, he bought another 3,000 of the same options for $210 each. He is making a $30 million bet on gold.

Unless something like this surfaced as a reminder, I normally don't pay much attention to the price of the gold bullions. I just accumulate them and put them away as part of the capital preservation and as an insurance policy. I also don't look at the direction of the Dollar as the primary force in gold bullions. Gold moves when smart investors sensed instability in the global financial system. The Dollar just happened to be there. It could've been any paper currency, and it wouldn't have made the slightest difference.

This Wilshire 5000 chart with the overlay of gold and the USD (the U.S. Dollar Index) shows that gold was already on the move during the 2001 recession. That's before the USD topped out in January 2002 (red circle on green curve). The stock market continued with its downtrend after a brief pickup from the 9/11 aftermath. Again, I use Wilshire 5000 to represent the broader market than the other indices. The US Dollar Index topped out at about the same time Euro Dollar was introduced to the world as the then 12-country European Union's official currency in January 2002.

Gold was ready to make its move after it completed its bottom consolidation almost a year before the Dollar made its top. Gold's uptrend was subsequently confirmed when it hit $275 and made that 2nd higher low (blue numeral 2).



"O.K. the price of gold has gone up, but it's only gone up in Dollar term."

While this is a correct statement that we heard all the time from the gold bears (and sadly from some gold bulls), this is not a complete statement. And, an incomplete statement that only mentions part of the fact could become a misleading statement. This kind of statement gives the false impression that gold has gone down in other currency terms.

Here's gold and the Euro 4-year chart.



And here's gold and the Swiss Franc 4-year chart.



And, so we see from these charts that the complete statement should've incorporated the fact that not only gold has gone up in Dollar term, but it also hasn't lost any value against other major currencies. In fact, as we're well aware of now, gold recently has gone up in other currency terms as well.

One simple question comes to mind after looking at these 2 charts. Why would anyone bother buying other paper currencies or bonds as hedge bets against the USD when you could own the real money, gold, instead?

In any case, I'd like to conclude this Sunday's Chartmentary by examining the correlation between the Dollar and Gold since they're on a collision course. Here's a chart that I posted on the Internet trade group forum on May 10. I noted that the gaps between Gold and the USD had been narrowing. Since this gap narrowing pattern could not continue indefinitely (Yes, I know, mathematically it can), something has to give eventually. And, back in May I was very curious to see what's going to happen next.



Something different did happen this time. Let's check out this updated chart below.

In the past, whenever the USD moved up, it seemed only natural for gold to back down. Not this time. This time, gold refused to submit to the Dollar. As soon as the USD started to break higher, Gold started to move upward just as swiftly. And, gold continued to rise even after the Dollar's recent retreat.

From the interaction of them two, it would seem very likely that gold is looking to cross above the USD soon. And that "may" take gold bullion price right over the $440-$445 range. Had that fund manager seen the same thing when he put the $30 million bet on gold? Or, did he know something about China's currency revaluation timeline that none of us know yet?



Finally, a chart of caution.

USD may have lost some momentum last week, particularly after the record current account deficit report came out on Friday, but its uptrend is still technically sound. For one thing, it hadn't dropped below its 20-day simple moving average (SMA) yet. The 20-day SMA is also the centerline of the Bollinger Band. Next, the 14-day RSI is still above 50, and the Aroon DOWN (red line in the center pane of the chart below) is still trending lower highs. This means there's no technical sign of Aroon DOWN gaining any reversal momentum yet. Aroon DOWN would have to rise above 30 to be considered momentum building. And, Aroon UP is still staying above 70. Before Aroon UP breaks down below 70, the uptrend is considered intact.

It's also quite likely for the USD to move back up to the target of 90.49 as a result of the Double Bottom bullish reversal pattern. The breakout of that center peak between the two bottoms was done with three days of strong up moves. Those moves could've formed a strong Candlestick pattern called "3 White Soldiers" if this chart were prepared in Candlestick format.



Nevertheless, the fact that the USD is still technically sound doesn't mean that Gold would have to just roll over. I've always believed that any correlation, inverse or not, between the USD and gold was simply incidental. Gold is destined to continue its move up because of the loss of confidence in the global financial system. It doesn't have to be against the Dollar. It would rise against whatever fiat currency gets in its way.

The Dollar just happened to be there.