Last week's update can be found here.
The Dollar
The latest::
The selloff gathered pace after a German newspaper cited a high-ranking U.S. Treasury official as saying the United States would intervene to support the dollar only after the euro reached $1.45.
Dealers and analysts said they viewed the German report with some skepticism, noting that the Treasury was more likely to be concerned about market volatility than about a particular currency price level.
The dollar perhaps can not be analyzed like other markets because the supply of dollars is unlimited. In a bear market, no price is too low. If the dollar manages to break beneath all time low of 80, it will paint an extremely bearish picture. The sense we get is US officials would like to see an improvement in the trade deficit before doing something about the dollar.
Swiss Francs:
Sfrancs is struggling at 87.5, perhaps a breather is due.
COT commercials have not reduced their net short position of SFrancs (50k+ contracts). Indicating the big price move may still be ahead.
US Bonds:
Resilient. 30-year bond rebounded sharply off 200 DMA on Friday amid weak economic report, indicating long bonds are still seen as a shelter for capital during economic weakness.
Gold
Gold continues to rise. We are only $30 away from the important $480 level. Remember it took mere months for gold to reach $850 once $500 was taken out in 1980. Strong support is at $430, a safe level for new buying.
Silver
Silver continues to advance. Once $8.5 is taken out, there could be serious fireworks as we continue to have extremely high commercial short position (nearly 90,000 contracts, or 450 million oz). Never discount the possibility of a quick re-test to mid-6's.
Palladium
Palladium moved little. We rolled our contracts to March 05 and put them to bed. Patience is required for this potentially very rewarding trade.
Gold stocks
XAU tried to break out of 112 last week but ended on Friday with a 3% selloff while gold declined only moderately. Is the selloff in XAU a warning signal of a correction to come? Or is it the last shakeout of the weakhands before XAU breaches the 112 resistance level? Buyers might wish to wait for the breakout to enter. We advise investors sit tight.
US market
Like long bonds, S&P 500 didn't give clear signal last week. While we think a decline in SPX is coming, we don't know when. We haven't advised shorting yet in 2004. COT commercials' net short is unchanged at 30k contracts. We will wait till Jan 05 AND a 80k commercial net short to re-evaluate our neutral stance.
Nikkei
Nikkei is still consolidating. At this rate, Nikkei is poised for a breakout by Feb 2005.
We are entering the classic phase of stagflation, where real economic growth is stagnant, coupled un-usually with rising inflation (as reflected by higher gold price).
If the Fed were to give everyone a $100 bill, the effect on rising prices will be immediate and does not affect output. Currently, in lame terms, the injection of money through debt and direct Fed intervention has run their course in producing temporary/illusory growth.
We wrote last week:
Gold is steadily climbing. Our studies suggest gold will be over $500 and could reach $800 by mid next year. To reach this target two things must happen
1. Gold must rise independently of the action of dollar index.
2. Gold must start rising at a faster pace (i.e. $5-$10 daily moves).
The feeling we got is that the big move is still ahead for gold and the dollar (up or down we don't know). The safest bet is buy XAU on breakout and begin to establish positions in bottomed commodities such as palladium, corn, and soybean.
John Lee
john@losb.net
www.maucapital.com