What’s Going On With Gold?

In a nutshell, the dollar is rising and gold typically trades inversely to the dollar index as readers of this blog know it has since the year 2000.

I had been cautioning gold investors that the U.S. dollar price of gold breaking to new highs needed a confirmation of the dollar index breaking to new lows. The fact that it didn’t even break the March 2008 lows of just under 72, let alone 74, showed there is still some perceived strength in the dollar and that a reversal was possible.

I liken this analogy to DOW Theory and non-confirmation of the DOW or the Transports. One index has to confirm the other in order to have a high degree of confidence you’re on the right side of the trade.

In the case of gold, the Dollar Index did not break to a new low and confirm the gold breakout to new highs, hence my call for caution.

Cash Has Been King for Two Months

Just having money in cash has earned an investor 5% appreciation (plus interest) since the dollar index low of 74 just a couple months ago.  The Dollar index as of this writing is sitting at 78.41.

The Gold EURO Trade Looking Great

That said, buying gold in EUROs is now looking like a good trade. There was no reason for the EURO to be as strong as it has been, testing its all-time highs. It’s down 1.43% vs. the dollar today alone.

Obviously there is no reason for the U.S. dollar to be as strong as it is of late, and we all know what’s going to happen long term because of government spending and Fed action, but that doesn’t mean buyers and sellers of gold and the dollar won’t try and shake people out of the trade.

In the last 60 days, since I first mentioned trading gold in EUROs may make sense, that investment is up 2.38% and in U.S Dollars, because of the bounce in the dollar, the gold trade is down 2.28%.  Those figures do not include today’s $30 U.S. Dollar plunge in the price of gold and the EURO’s 1.43% fall versus the U.S. Dollar. I will update this chart tomorrow (see updated chart below).

It May Very Well Get Worse for the EURO

Please consider Ambrose Evans-Pritchard’s article yesterday; “ECB prepares legal ground for euro rupture as Greek crisis escalates”

Fears of a euro break-up have reached the point where the European Central Bank feels compelled to issue a legal analysis of what would happen if a country tried to leave monetary union.

There may be other factors influencing gold and the dollar that pop up or can be a game changer, but for now, the trend of the dollar higher and gold lower is in place, barring any of those “external influences.”

As I always say…Holders of physical gold care not that it falls to $700 or lower on its way to $2,000 and higher.

UPDATE 1/21/2010

The chart below shows the move that gold is making priced in EUROs.  Up 2.27% in the last 30 days.  Not a bad years return these days!

UPDATE 1/22/2010

It will be interesting to see the effect of Obama’s interference rhetoric in his push for limiting bank size and investments.  Everything I have read shows this to be dollar negative (and stock market), which would thus be U.S. Dollar gold positive.

“The American people have paid a very high price. … That’s why we’re going to rein in the excess and abuse that nearly brought down our financial system.”

The problem with this thinking is Obama is treating the symptoms, not the actual cause of the crisis.  It was the Federal Reserve’s artificial manipulation of interest rates down to 1% that was the first domino to fall.  From there, Fannie and Freddie were lending to anyone with a pulse and then Wall Street got involved repackaging loans and selling them to countries like Iceland and others as highly rated investments.  The whole thing is a sham, but make no mistake about it, the Federal Reserve started the domino effect.  They are at the root of the problem and Obama has it all backwards.

The Dollar index is down today and gold is also down.  Dennis Gartman today announced that he is now bullish on gold price in U.S. Dollars again and emphasized the problem with the EURO as I addressed above and in other articles.

What I’d keep an eye on from a short term perspective, is whether the Dollar index breaks down, first below 77 and then below 74.  74 is the most recent line in the sand and a break of the March 2008 lows of just under 72 one would want to be “all-in.”  If we break above 79 from here, the Obama rhetoric may be just viewed as rhetoric and nothing will come from it….kind of like a national health plan.

Elliott Wave folks are still calling the Dollar index to rise above 90.  But first it would have to break 80.

Interesting times that keep on changing with every week!

The Elliott Wave folks cant account for government interference in the markets.  This is something to keep an eye on and you can bet your bottom dollar, I will.