A CRITIQUE OF THE US DOLLAR
David Petch
Note: This article was originally posted on April 22nd, 2006. The USD currently sets the gold price, but as the Euro and Yuan gain a greater percentage of investor confidence the set price of gold is likely going to be more reflective of individual currencies than the USD. This is already happening in India. I can not remember the exact number, the in the Indian currency, gold is already at or more than the 1980 record in Rupees. There are many wealthy people in the world with trillions upon trillions of dollars and many middle class folk that want to preserve what we have. There is not enough gold to satisfy the current amount of money floating around the globe, so this means that gold will get revalued to a price reflective of a balance. Assume all the gold ever mined till 2001 was 145,000 tonnes, with approximately 90% remaining in circulation (10% lost over time from sinking ships, industrial applications etc. etc) bringing the number down to 130,500 tonnes. There are 32,150.72 ounces in a tonne, bringing the total ever mined (including 2500 tonnes per year from 2002 till the end of 2006) to 4,597,552,960 ounces. Taking the Friday (April 21st, since this article was originally posted at the beginning of last week) gold price close of $632.50/ounce, the total worth of gold in the world is $2.91 trillion dollars. I could not find any statistics on the amount of total money supply, but assume there will be around 90 trillion dollars at 2010 (assuming 15-20% global monetary inflation between now and then) in cash from each country thrown in a pot. In order to balance things out, the price of gold would have to rise 30 fold from current levels to $18,960/ounce. Note that I have not included the 54 billion dollars of unfunded liabilities in the US or other countries, which if included could be in the hundreds of trillions. The bottom line is that gold is still very undervalued and may go higher than all of us believe. One thing for certain, gold at $5000/ounce would see governments seizing mines for political stability. Even if a new currency were to be installed, the value of gold in the new system would still create many millionaires. Back to the USD analysis.

Update of the US Dollar Index

Now that I have cleared my thoughts, a focused analysis should be seen (if not, be prepared for a diversion J). The lower Bollinger bands are beneath the index, which could be signaling an interim bottom. The downside pressure in the USD should exist for the next 6-9 months, pending how quick the price objectives are reached. Compare October 2004 to the present setup: the upper Bollinger bands all curled up, similar to the current situation. The short-term stochastics are forming a tight wedge structure with 4 upper touch points and 3 lower touch points. A break of the lower trend line would see a similar decline in the USD as from October to December 2004, while a break to the upside would suggest a gentler decline to the 81-82 level. An interim bottom in the USD is possible, but it could be a mere blip on the decline.

Figure 1

Red lines on the right hand side represent Fibonacci price projections of uptrending wave price action projected off of subsequent lows. Blue lines on the right hand side represent Fibonacci price retacements of the advance. Areas of line overlap form Fib clusters, which represent important support/resistance levels. Moving averages are in a transitory phase, with the 155 day MA above the 50 day MA. This represents a shift in the longer-term momentum with shorter-term momentum. The 38.2% retracement of the move from the 2005 low till the 2005 top. A build-up of sideways action implies indecision. A break below 87.8 would imply a sharp decline to the 82-83 level. Full stochastics have the %K is beneath the %D, with no indication a bottom is in yet. As mentioned from the prior Figure a bottom could be in the process of being put in, but the similarity to the May till late October pattern is very eerie. What could appear to have a bottom being put in could in reality be the prelude to a sharp decline. A decline would occur rapidly and this would be associated with a final spike in gold for the short-term before a 6-8 month consolidation period. The new line in the sand to watch is 87.8………a move below this is a prelude to a potentially sharp sell-off in the USD.

Figure 2

The weekly USD index is shown below with Fibonacci time extensions at the top of the chart and Fibonacci price retracements of the decline shown on the right hand side. Failure for the 38.2% retracement level to be reached is bearish and is confirmed by a break in the lower triangle trend line. The lower Bollinger bands are in a setup for a decline, with the next Fib date in June 2006. Full stochastics have the %K beneath the %D with an ominously long way till a bottom is put in. While the daily charts show the possibility of a short-term bottom, the weekly chart appears bearish.

Figure 3

The mid-term Elliott wave count of the USD index is shown below. Wave (Y).[A] ended with a non-limiting triangle, with wave [B] currently underway. The alternate count would have wave C.(X) underway, but given the geopolitical situation around the globe and other countries raising interest rates, I think people as a whole realize there are better currencies to park money. One other alternate count is wave B.(Y) is underway, but given the sharp volatility, I would place a lower probability. The key is the 87.8 level. A breach of this Fib support level (Figure 2) implies a continuation in the decline to 82-83 and it could do so in a hurry.

Figure 4

The long-term Elliott Wave count of the USD index is shown below. The decline for wave a counts best as a double zigzag. The data from October till present on the prior chart is compressed for some reason, giving an improper visual representation of the actual non-limiting triangle structure. Below, the triangle has the proper dimensions, with the thought pattern of what the decline in the coming months might look like. Even though a bottom around 81-83 could occur by mid to late June, the index could simply bounce off the lows until the end of 2006 before rising in wave[C].x in 2007. Wave [A] is thought to represent the first wave of a non-limiting triangle that should last until mid to late 2009.

Figure 5

This article was originally posted on our site on April 22nd 2006. I also cover the 10 Year US Treasury Index, AMEX Gold BUGS Index, S&P 500 Index and the AMEX Oil Index. The premise of my work primarily is market timing (the past year has been quite successful, with some minor bumps, but analysis as per this article makes judgment calls based upon key support/resistance levels), but have been spending time trying to find companies in the energy and gold/silver Universe (one is a gold royalty company doing business with Golden Star Resources).


David Petch
Market Letters Digest
www.treasurechests.info
29 April 2006

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