The Dollar is Not the Story

February 6, 2006 – When you follow the markets with as much careful and continuous attention as I do, it’s inevitable that you end up hearing a lot of nonsense.  The trick is to separate the nonsense from the good stuff – to separate the wheat from the chaff.

There are no easy ways to do this of course.  Something that sounds plausible at first blush may very well upon closer examination turn out to be rubbish.  Conversely, some remark you hear uttered by someone in passing may turn out to be a hidden jewel. 

So how does one go about separating the important information from everything else?  There is unfortunately no easy answer to that question, but here’s what I do.  I watch charts, literally dozens of them, and I do so with one specific purpose.  I want to identify the trend.

I know from experience that if I can properly identify the trend of the market, I can make money from it.  Perhaps just as importantly, following the trend enables me to sleep well at night.  In other words, I don’t worry about my positions when I am invested or trading with the trend.

Because I follow trends so closely, I place a lot of reliance upon the closing price – daily, weekly and monthly.  There is a sound underlying logic for doing this.  During any time period, there can be a counter-trend price move.  There can also be a lot of meaningless volatility.  But at the end of the day, and particularly at the end of the week, you have your money invested alongside others on the same basis – the day traders, scalpers and other short-term traders are out of the market. 

So when you invest your money in this way, you are betting on the trend.  You are betting that the underlying trend will continue.  Just as importantly, each day, week and month you are testing your underlying fundamental analysis as to which way you think the market should be moving versus which way the market is in fact moving.  It is the reality of what is actually happening in a market – whether the trend is up, down or sideways – which provides the key to making money in the markets. 

In short, as they say so often when it comes to markets, the trend is your friend.  It may sound trite, but there is a lot of wisdom in that adage, and it’s probably the most important thing I have ever learned about markets.

I am making this longwinded introduction for a reason.  There is so much nonsense out there nowadays about the dollar that one has to really wonder what some of these people are thinking.  I’m specifically referring to those people claiming the dollar is “strong”.

It’s not strong.  If the dollar were strong, gold would not be doing what it is doing on the accompanying chart.

This chart is familiar to long-term readers of these letters.  It presents the month-end gold price from 1967 to the present, and it shows three major trends.

The first trend is gold’s bull market in the 1970’s, which is depicted by a rising green line.  The second trend is marked by the two parallel red lines forming a slightly sloping downtrend channel.  We can see from the chart that these parallel lines depict a ‘flag’ formation – the green line being the flag pole.  Flags are consolidation patterns, and this one shows the consolidation of the tremendous gains made by gold in the 1970’s.

The third trend on the chart is the other green rising line, which marks gold’s advance over the past five years.  It is this trend that is of greatest importance because it shows what’s happening to gold now.  Please note the following:

(1) Look at the green uptrend line in the 1970’s.  Over how many years does it stretch?  Why couldn’t this current uptrend line stretch for at least as many years?  The point is, it could.  Remember, the trend is your friend.

(2) Note the two horizontal dotted lines on the above chart.  The first one marks $500, and we can see gold has already penetrated it.  The second one marks gold’s monthly closing high of $681.50 made in January 1980.  That higher resistance line is just a chip-shot away, and gold looks ready to probe it.

(3) Note that gold is breaking out of the ‘flag’ formation.  I’d like to see some follow through to the upside to confirm this breakout.  Nevertheless, breakouts like this one start small and then develop over time.  I think this breakout is significant.

(4) Note how the uptrend in gold is pulling away from the green line.  Do you see the similarity of this pattern to what happened in the 1970s?  In two instances back then the gold price pulled away from the green uptrend line – like it is just starting to do now – and never looked back.  Similarities like this one are important because in technical analysis, history often repeats.

So to repeat the important point, regardless of what you may be hearing, the dollar is not the story.  Look instead at the trends, as they tell us what is really happening in the market.  In this regard, I would like to share with you some insight that Bill Murphy of www.lemetropolecafe.com shared with his readers one day this past week.

It remains amusing to read the reasons given by the mainstream gold world as to why gold is on the move. Most are valid to various degrees, but fail to get to the heart of the matter. Today it is safe haven buying due to Iran and the Hamas victory in Palestine. The fact that oil was lower until late, the US stock market higher and US interest rates higher, and the dollar quiet, is lost completely in the analysis of the day.

It is really incredible how the Planet Wall Street pundits and reports use whatever is convenient for the moment. Relationships which are supposedly so interlinked are used one day and thrown out the next. If safe haven concerns were so prominent, US interest rates would have come down, the stock market would be hit, and more than likely, the price of oil would be shooting up.

The dollar, which was comatose, might also have risen sharply due to the same safe haven concerns.

None of this is going on. We are seeing a surge in commodity prices across the board which is a contributing factor to the rising prices of gold and silver. Yet, here too, we have seen this in the past and watched gold and silver do nothing.

What is happening at the moment is what Frank Veneroso predicted in his presentation at the GATA African Gold Summit in Durban, South Africa nearly 5 years ago. The Gold Cartel, which artificially suppressed the price of gold for a decade, is hitting the wall concerning gold supply to meet surging demand.

I had the pleasure and honor of speaking at that Durban conference and sharing the podium with Frank.  I heard him make that prediction, which is proving accurate.  And the trends are indicating that Frank will be proven right.

So in conclusion, gold is clearly the story, and the dollar is not ‘strong’.  And given the major uptrend in gold that is now underway – which is being confirmed by the upside break-out from the flag formation – it looks like gold will remain the only real story for a long time.