Lets blithely ignore the last three years of steady 54% weakening from 0.835 to 1.293. Yet you cannot do huge moves in currency terms such as the 13% move from Euro 1.138 on 7th November 2003 to 1.293 on 18th February 2004 -- without searching for some balance and consolidation. Stretched elastic bands released, regain some shape, even if overstretched.

Or how about this one - "The Japanese Yen is a Casualty to the Dollar!" On a 4% move from 105.21 on 11th February to 109.27 now. Yet the perspective changes if you look at the size and speed of the 10% move from 117.67 in September 2003 to 105.21 ten days ago in February. Even a strong trend has to pause and wiggle a bit backward.

Traders know not to use terms like "recovery" or "revival" too soon. Trend has its own language and rules. Only after short term "overbought" or "oversold " ranges settle back to find some balance - the potential for a reversal or to build a new platform can be assessed more realistically.

Right now- currency traders just love movement from the Euro overbought zone. Traders jump aboard for the US$ buying ride -- adding to the illusion that a phase of sustained US$ buying may have begun.

The targets traders are expecting or hoping for are like big navigational beacons -- in the case of the Euro at about 1.220 or at 1.180 or even at 1.150 for the more bullish. According to an 18 day short-term cycle study -- look out for the US$ buying to end near 11th March.

Meanwhile traders know that the Euro is a sell on bounces and that they can look to buy mighty Uncle Sam's $ for a while. They had better not get hooked on this habit. While the 1.105 Euro support area holds, behavioural counts highlight scope for the 1.450 to 1.600 zone within months -- or next year -- either way, not long in the bigger picture.

US$ bulls have fun while you can. Six month and one year momentum mixed with some common sense -- say that the US$ will be sold heavily again -- once the current rally is over. Even though everyone loves the magic illusions that Uncle Sam is so good at creating.

So there'll be some pressure on the $ Gold price for a while as well. To $392 support ? To $385 support? To $372 ? Until mid-March or April? Could be. US Gold shares can come off quite intensely.

No matter - the close link between the US$ and the Gold price is going to change. That will be when gold and the rest of the precious metal group is bought for its own buying power virtues -- not so much because of arbitrage links to the US$.

A $640 + gold price is not easy to understand now, despite technical long term swing counts that have been setting up since August 1999. History shows that crowds deny unpalatable truths until they can't be denied any more ( after the event). The answer will look obvious when we look back at global vulnerabilities in good time. No-one, not even the US can indefinitely print money and borrow money and spend and avoid powerful impact on the real buying power of its currency. Unfortunately, as dominant figure in the financial system - the buck will stop with others as well -- not just Uncle Sam.

Meanwhile as the US$ is bought for a couple of weeks and even the wary get complacent again -- gold and precious metal bulls will be ridiculed as being a bit weird and off the mark. They will happily and patiently be buying precious metal beneficiaries in the dips though.

Victor Hugo

www.HugoCapital.com
www.SAgolds.com
www.GoldSignals.com

25 February 2004