Current status of gold and dollar Trades

by Mike Endres, Market Trend Trader | January 5, 2010

Gold and the US$ usually move in opposite directions. In recent months, however, gold has done a good job of breaking out in the positive direction in almost all currencies around the world. Right now we are in a position that is very hard to analyze without some tools and that's what I'll try to show you today (based on close 1/4/2010).

First, let's look at the U.S. $$ in terms of short and medium term potential

On a daily basis, the MRO is climbing from an extremely oversold condition showing weakness. The short term outlook for the US$ is therefore down to sideways.

Next, we look at a slightly longer term US$ chart - a weekly calculation.

Here we have a different story to tell. The Weekly Chart says BUY for a medium term but without a lot of enthusiasm. The MRO continues down (strength) through the zero line with a valid but weak BUY.

Now, we'll look at gold that is also giving a mixed picture depending on how far out you want to look.

The daily chart for gold is quite positive giving rise to short term strength - or at least little likelihood of further decline at the moment.

Gold on a weekly chart shows an entirely different picture. Here we have the MRO rising off a short but overbought position. This gives us an intermediate term SELL in force.

Summary: Things are mixed in both dollar and gold terms. The best charts show XLK (Technical ETF) and QQQQ (Nasdaq proxy) both in a rising mode short and intermediate term. Needless to say, at the moment I'm long QQQQ, XLY, XLK, EEB and UUP (lighter on the later). All of these are showing strength both short and intermediate term.

Of course the MRO cannot forecast an announcement on Sunday afternoon that the FED is now going to start jacking up rates the next day or some other event that causes the market to react with sudden fear as a driver.

I have taken note that one of PIMCO's top funds (PHK) has cracked and taken a terrible beating over the past few trading sessions. That spells "trouble" out there for interest rates or perhaps just the results of Bill Gross making the statement that Pimco is lowering its exposure to US Treasury debt.

There are arguments on both sides of a move like that. Some feel that the Fed will, shortly, become very aggressive in their attempt to drive down rates out to 10 years or so. Others are saying that the lack of buying of US Treasury debt by China and others will drive interest rates up significantly, making the servicing of the U.S. debt totally unmanageable (which it is already but just hasn't croaked yet).

Just remember that should we become our own lender of last resort, with the Fed buying great quantities of Treasury debt because of no other buyers, economic realities will come to the fore and very bad things will follow almost immediately.

The only saving grace is that we are still the biggest, freest and richest nation on earth. That is only a short term fact if we keep going the way we are. It's still a fact that if the US crashes, the whole world crashes with us. This provides us with a small window of time to get our house in order, write down inflated assets, break up anyone "too big to fail" until they aren't and accept the tune that the piper is playing. That means a deflationary depression, we all get poorer for a while but in a year or two or three we can begin again to honestly grow as prices and demand once again slowly become aligned.

Instead, we'll likely follow the Japanese model into more or less a permanent state of stagflation where we all loose for a lot longer as bankers drive the Federal Government deeper down a dead end alley and sooner than later, hit the wall at the far end. Too bad.

Contact Information

Mike Endres | Market Trend Trader | Gainesville, Florida | Email