Dollar Weakness Foretells Year-End Gold Rally

Nov 27, 2006 – While America was celebrating Thanksgiving, the US dollar swooned. Major support was broken in the process, and the US Dollar Index closed at the lowest level since April 2005. The extent of the damage can be seen on the following chart.

Support at 84 had been holding, but has now given way. We can see that the dollar is falling over a cliff. Therefore, the following conclusions seem logical.

1) For nearly two years the dollar has been in a bear market rally. It has been a weak rally, as the Dollar Index could not even climb above its 2004 high. So rather than calling it a bear market rally, it is more appropriate to say that the dollar has been in a “bear market trading range”.

2) The Dollar Index remained within its downtrend channel (the parallel red lines on the above chart) throughout this “bear market trading range”.

3) Both #1 and #2 above are indications of severe weakness. Accordingly, it was only a matter of time before the Dollar Index resumed its multi-year downtrend. That time has now arrived, as indicated by the break of the green uptrend line in the above chart.

Aside from the technical considerations above, the fundamental outlook for the dollar remains dire. Nothing has changed. The trade deficits and growth in government debt are out of control, which means new dollars are being created. We know this to be a fact even though the Federal Reserve is trying to obfuscate the situation by no longer reporting M3, the total quantity of dollars in circulation.

What’s worse, even as the quantity of dollars is growing, the demand for the dollar is falling. There is no practical way to measure the demand for money, but we know that the demand for the dollar is falling. We can read it in newspapers almost daily. Central banks around the world are diversifying out of the dollar. This diversification is a sign that the demand for the dollar is falling. It’s also a sign that you should be diversifying out of the dollar too.

The dollar is in serious trouble. Years of abuse by spendthrift politicians and stark neglect by bureaucrats are starting to show. The collapse in the dollar, which began several years ago, is starting to pick up speed. Get out of its way just like you would do for an avalanche.

The best way to avoid the dollar is to hold gold and silver. The precious metals are time-tested. They have proven themselves time and again in a monetary crisis, and there is no reason to suggest that they won’t prove themselves again as the dollar tumbles from here. In fact, look for both gold and silver to continue rallying as we approach year-end.