30/11/2009 by Philinje.

The first glimmer of a new wave of problems popped up, just as America was sitting down to its Thanksgiving holiday. The net effect is that JPY carry trade reversed to some degree, causing declines in Yen currency pairs and especially the EUR/JPY, which came closer to the magic 120 number where carry trades might unwind in earnest.

Interestingly, gold also got hit with a quick decline to $1140. That level was only breached to the upside early the same week, and now looks like support. Prices drove straight back up to settle at $1176. The big question is, Is the $1190 level a local top?

Clearly, gold is viewed as a risk asset at present. It’s ironic, but all the evidence so far points to the current high price being fueled by speculation more than anything else. Also a bit strange is that the dollar did not shoot up the way the Yen did. Either this says it is more resistant to carry trade unwinding or possibly that Europe is more exposed to probelms in the Middle East. But EUR/USD came down only a bit, enough to take the wind out of the breach of 150, and not nearly as much as EUR/JPY.

General US equities declined too, and that caused just a moderate bump up in the dollar index. So really, it looks like the dollar is extremely weak, as it’s already drifted back below 75.

This brings up an alternate scenario that is being tracked by some E-wave experts. Thanks to Art Roldan, a subscriber at Ron Rosen’s site, a new Elliott Wave analysis says we might have seen the start of a minor wave 4 down 10 $1070 and then a wave 5 up will take gold to the $1300 area, which is the projection from the inverse Head and Shoulders pattern.

Wave I with 5 minor waves

If this scenario plays out, with a possible high next March-April, there might still be a decline in gold into next October. And it might still be a major wave C, but that starts to look less likely. On the other hand, if a current decline in gold carries past $1070 and let’s say past $1020, then the likelihood of wave C down remains high.

Given how weak the dollar looks, I give either scenario 50-50 chances. If there is another financial scare in the US, that might cause a dollar spike from the dollar carry trade unwinding, so certainly we can’t rule this out. But the Fed has to monetize several trillion of debt in the next 12 months, and that means a lot of downward pressure on the dollar.

By the way, gold was breaking out to new highs in a number of currencies, including EUR and GBP, but the Dubai scare has temporarily knocked prices down. Given that both currencies have remained relatively strong against the dollar, the gold price action has been impressive.

Let’s see if we get a correction down to $1070 - 1020, and let’s see what happens when the US traders show up at work later today.

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21/11/2009 by Philinje.

The correction here refers to an error. Previously, Ron Rosen calculated a pontential high of wave B in gold at $1120. He has now corrected that to be $1168.70.

The reason is that Elliott Wave rules talk about an Extended Flat correction usually resulting in wave B being 1.382 times wave A. I guess his earlier calculation did not use the 1.382 factor.

The wave B at the end of 1974 was 1.382 times wave A. Here are the numbers:

1974

Wave A - $134, down from $179.50

Wave B - $197.50, and 1.382 x wave A = $196.88

2009

Wave A - $681, down from $1033.90

Wave B - 1.382 x wave A = $1168.70

The high this week was $1153.40. But there is some chance of a turning point top on Nov 24 and gold did not decline much by end of week, ending at $1151 after a brief dip to $1130. We could see gold in the vicinity of $1160 next week.

And of course it could go higher before a correction starts. If the wave B and Extended Flat theory holds, gold will then not see another higher high until after the wave C low, July to Nov next year. But if this theory is not valid, then gold might see a mild correction and keep heading higher. Regardless, the cycles of Martin Armstrong project a major low next Oct.

So, a wave B top could be in the vicinity of $1160-70. But otherwise gold could head to $1250 - $1350 in March-April after a mild correction and then another correction could result in a major low next Oct. The reason $1250-$1350 is talked about a lot is that is the projected completion of the inverse Head and Shoulders pattern that is so visible on the gold chart.

Most people see it as an inverse Head and Shoulders, but Ron Rosen sees it as part of an Extended Flat correction. Time will tell. In a sense, Rosen’s forecast is more optimistic, because after the low in 1976, gold shot up to its historic high at $850 in early 1980. But this time the wave C low will be below $681, because wave C ends below wave A.

Yes, it is possible that gold hits $1250 AND the wave C occurs afterward, but in that scenario it is more likely that gold will correct mildly and consolidate until next Oct. Rosen is almost alone in his forecast of a wave C, but he presents compelling evidence and reasoning, and he is an ardent gold bull with many years of experience.

We will see what happens after a near-term correction and then the following high. If that high goes higher than the current high, the wave C scenario starts looking unlikely. For now, it’s a possibility like all the others.

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19/11/2009 by Philinje.

The reasoning behind the dollar rallying if bonds fall is based on the scenario that bonds losing value could cause unwinding of carry trades, which will cause borrowed dollars to be returned.

However, there is a related scenario of bonds falling that would also be coincident with the dollar falling. This is the currency crisis that so many people have talked about. In this scenario foreign countries see no hope for the dollar and refuse to purchase more Treasuries - ie, countries like China would stop loaning money to the US.

There is already a trend getting started of countries purchasing less Treausries than before, at the same time that the Fed is buying Treasuries - aka Quantitative Easing. Initially the news that the Fed would do this caused bonds to rally, but then they dropped nearly to the 112 level, which is now the neckline of a Head and Shoulders top formation. Lately, 30-year Treasuries are staying high, near 120, but if they were to drop below 112, that would be a bad sign.

In the article below, the author notes that the Fed is currently buying almost half of all Treasuries that are auctioned, while countries like China are buying a lot less than they used to. So the Fed is propping up bonds by printing dollars, while forex traders are “selling” dollars to buy other things. In an extreme case, foreign owners of dollars and US bonds could flee the dollar, which would cause it to collapse. So many people are warning about this that it seems a tad unlikely.

Nevertheless, flight from the dollar would cause bonds and the dollar to sink together. But I suspect in the initial stages the dollar would rally, before giving up the ghost.

Here is the article:

http://www.gold-eagle.com/editorials_08/summers111109.html

The author is really saying that a collapse of stocks is actually more benign than a currency crisis or a country crisis. But there are intermediate stages where things may look different than he outlines.

Please note that in the stock crisis, the dollar will likely rise and gold may suffer, at least for a while. But it will suffer less than other assets. And in the currency crisis or country crisis, gold should go through the roof. It might be that we move from one stage to the next, and the transition from the stock crisis to the currency crisis will result in bonds falling while the dollar rises, at least temporarily.

Regardless, gold has the potential to rise even if the dollar is rising, and it can spike easily into the thousands after factoring in inflation from the last time that happened in 1980.

In the short term, gold hit $1150 and it looks like a correction is unfolding. If it holds above $1000, that might mean it has more legs and it could climb to above $1150 in the next few months. Everyone hates the dollar right now which is a reasonably good indication it will probably rise. But after a mild rally it could dive down to its all-time low of 71 and that could put the top in for gold, in the near term.

Or, something catapults the dollar, like bonds breaking below 112 because the Fed decides to ease off the Quantitative Easing. That would set in motion severe problems, like mortgage rates going up, so it’s not that likely, but in the meantime the Fed is monetizing US debt, ie printing dollars to loan dollars to the US, which is clearly dollar-negative and makes US bonds even less attractive.

If you’re trading gold, just keep mind that how the dollar behaves may be counter-intuitive, so stay alert. Otherwise, accumulate gold on dips, preferably physical gold. There is a lot of noise right now about fake gold bars being discovered (filled with tungsten). This is yet another sign that gold demand is outstripping supply, and that people are demanding physical delivery. For the average investor, gold coins and maybe gold at the Perth Mint are two good choices. I am still comfortable with BullionVault, but I know that’s not for everyone.

If a correction unfolds now, let’s see how gold does around $1000 - 1020. It might not even get there.

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16/11/2009 by Philinje.

If equities decline, we could see a rise in the dollar. While this doesn’t guarantee a drop in gold, it will probably have an effect in the short term. Gold is spiking today in Asia to a new all-time high and is currently at $1130.

Here are three articles with pretty compelling evidence of why equities might decline quite soon:

http://bespokeinvest.typepad.com/bespoke/2009/11/breadth-not-yet-confirming-new-highs.html

http://www.hussmanfunds.com/wmc/wmc091109.htm

http://www.marketoracle.co.uk/Article15052.html

You can see in the last article how the current rally has re-traced 50% of the fall in 50% of the time, as well as a variety of timing cycles. Hmm.

If gold corrects, and sooner or later it will, a number of sources are talking about $1020 as the low. And maybe we get near 80 on the dollar index. The high that follows will be meaningful - either we get to a new all-time high (possibly near $1250) or we get a lower high, increasing the risk of a major decline.

As of right now a number of cycles have converged saying yesterday through the 18th will be a major turning point for equities. Gold could see some downward pressure as a result, and then the next high could be in December or early January. There is some chance we will see $1250 to $1350 into early next year, like March-April, and then a decline into October. Continued strength through the next decline will be quite telling.

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13/11/2009 by Philinje.

The dollar bounced then came right back down to 75 and bounced back up to 75.7. Gold got to a hew high at $1123 or so and came right back down to $1100 as the dollar bounced up again. What a see-saw.

The sentiment in forex markets is negative on the dollar because last Friday the Non-farm Payrolls report pretty much sealed the deal that the Fed would not raise interest rates, at least until Jan. That’s what caused the dollar to come right back down to 75 (actually a little under). But at this point that level looks like a double bottom, and who knows, there may be a decent rally in the works.

There is a hidden risk lurking behind the current reflation, and that is the newfound popularity of the dollar in carry trades. Everything seems to be counter-correlated to the dollar right now. Dollar goes up, markets go down. Dollar goes down, markets go up.

The reason is apparently because of the super-low interest rate on the dollar, currently at 0.25%. That is lower than the Euro, GBP, AUD, etc. and about on par with the Yen. This means that it has become popular for traders to borrow dollars to purchase other assets or other currencies - at least until things turn.

And that’s the risk. If there is any kind of scare from bad news, all those “short” dollars will be un-borrowed in a hurry. Last October that is what caused the Yen to spike so dramatically. The dollar spiked also, partly because so many obligations or assets are denominated in dollars (and were reversed in a hurry) and partly because it is a safe haven. Now, the dollar is competing with the Yen as the carry trade currency of choice.

This is why some notable commentators have declared a rally in the dollar in the near term. Here is an example from Nouriel Roubini:

http://www.nakedcapitalism.com/2009/11/roubini-predicts-mother-of-all-carry-trade-unwinds.html

Note that he makes the point that so many financial assets and commodities are being fueled by borrowed dollars. It’s clear that with gold, its recent move higher is following directly from dollar weakness. But you could say the same thing about oil and equities. Because it is so easy to make a big profit with money that is less than free, this is the best game in town in the trading world. “Less than free” refers to the fact that paying next to nothing to borrow dollars and parking it elsewhere gives you an excellent rate of return - it’s like being paid to borrow money.

That is, until things turn. Keep in mind that greed characteristically leads to large leverage, which means with a certain amount of collateral people will borrow 2x, 3x, 4x… 100x the amount in dollars to play the same game. When de-leveraging occurred last October, look what happened to the dollar. What happens now when the leverage with the dollar is X times larger?

Forex traders are watching the Euro and dollar to see if the dollar strengthens or the Euro weakens to a point where carry trades would unwind. That would be just above 80 in the dollar index. On Eur/JPY that level might be 120, maybe lower. But on the whole, people expect the dollar to continue moving down because there is no expectation at present the Fed will raise interest rates.

At least one analyst is predicting a small bounce in the dollar to 82 or so. That could be a test of how stable the current house of cards is.

Regarding gold, we may be at a turning point now, or dollar wekaness will prevail and we might get a blow-off top in gold. One target was $1120, another is $1350. If the dollar bounces with some gusto, we could see gold at $1000, and then maybe the blow-off top happens. Or dollar shorts could cover explosively and gold could get hammered down to $960 or lower. Still, in any calamity, gold will do comparatively well. But a 40% hit is still painful, if last October repeats itself.

Another thing to watch is bonds. 30-year US Treasuries seem fairly strong, and it seems they could get stronger. But if they break below 112, look out below. That would add fuel to a dollar rally and then we get potentially explosive de-leveraging in the dollar. If there is a market crash at the same time, whoa.

So, that is why my mood is cautious. Maybe the recovery really is working, or maybe the finance industry is gorging on free dollars. If the latter, then the current picture is quite fragile indeed.

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07/11/2009 by Philinje.

There is a turning point next Tuesday for equities and gold, probably a high, according to one cycle theory. Delta says the next short-term turning point is Nov 15 or so, which is probably a low (the last one was Nov 4, apparently a high).

Next Tuesday is day 86 of the 86-day cycle, which is loosely based on Martin Armstrong’s work. If gold and equities stay at current levels or go higher, that could mean they form a top on day 86. But it’s also possible they could accelerate higher.

So far, equities have been correcting while the dollar has bounced from 75 up to 76.8 then settled at just below 76. If the dollar goes up from here, it will have formed a higher low. Then if it moves above 76.8, it will have formed a higher high. That would signal the beginning of a rally (though of course no signal is a guarantee, it’s just something technical analysts will observe).

Gold itself seems quite bullish and there is the potential to reach $1120 on this move. If that happens, there will be some correction and the severity of that will be telling. Gold seems to be acting alone and according to some, the relative weakness of mining stocks is a non-confirmation of gold. Silver, too, is not as strong as gold.

So caution is still warranted and really there are no firm indicators of what could happen. But $1120 seems to be an upper target and will likely be a top of some sort.

Let’s see what happens next Tuesday then later in the month.

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