Gold's Pending Collapse

March 30, 2005

My gold customers must be quite upset with me at the moment. I have been a gold bull for over two years, but recently the merging of short, intermediate and long term technical views have indicated a large increase in the potential for a bear break in gold. Moreover, the dollar supported out at a critical fundamental and technical price point and appears prime to correct in the near term. With the upcoming Employment Report this Friday one must look at this as a potential catalyst to determine the near term trend in the dollar and in turn metals. I cannot help but be a metals bear and owe my readers what I always provide - an honest view. Gold will be well below $400 by mid-summer and here's why:

THE US DOLLAR

Because gold is priced in US dollars, and because the US dollar is the focal point of the economic trend shift on a global level, we have recently witnessed an impressive run in metals as the dollar has retraced 33% in less than 3 years. But the trend in the dollar has changed. We are in the midst of a rebound in the US dollar - perhaps to par if not higher. Just look back to my comments back in late November. The signs were all over the place - even then.

To recap November's article, I called for a currency intervention of epic proportions over an extended period of time from multiple parties. In 1995, backed by powerful statements from Mr. Rubin and US government bigwigs, the US declared a strong dollar policy that set in motion a 7 year bull run from 80 to 120 on the index. In less than 3 years we have eliminated the entire move as the US tries to counter balance numerous economic worries by increasing our export abilities. Over this time we have seen gold go from relative modern day lows to break historical price levels as we cleared $400 and then the all important $430 as the dollar went to these extreme lows. This time the European Union stands out as the glaring difference between present day and 1995. No longer does US dollar policy rule the global trading environment. We share this rule with a growing power in the European currency structure and in turn the bulk of European nations are at the same export disadvantage the US had just under 3 years ago.

After the article, Treasury Secretary Snow and a crowd of others came out and basically said the dollar did what 'we' needed it to do and the plunge is over. Technically speaking this spurred the run through critical resistance at 8485 and the market ultimately leveled off in the mid-85 area, only to test the lows again. The recent support, which incidentally was above the double bottom support, shows the biggest technical sign of all - the market was not willing to set fresh lows. So a technical analyst would look at this and make one of two conclusions - we are setting a narrowing channel (long term pennant) or the market developed bottom support and is heading higher. Either way, the dollar has seen its lows for a while, and if the market breaks to 86 watch out.

THE GOLDEN ARC

Followers of my newsletters know that I am big on having proper macro perspectives on a market. Perhaps, this is no more relevant than in gold analysis. On a monthly chart, one sees what is possibly the most perfect and true saucer formation I have ever come across, suggesting increasing upward trend line support in gold for several years. But true technicians know that saucers ultimately fail, and fail in a fairly unpredictable fashion. Recent breaking of the tightest arch you could effectively draw on the monthly chart suggests a weakening in the fortitude of the pattern, and the recent strong support in the dollar and 'life raft' pause by the gold market suggests the writing is on the wall for a full on break of this long term pattern.

The bottom line is a move to 360 doesn't change the long term bullishness of the market. In fact it's a blip on the screen if you a true gold bull. If the dollar is even in a dead cat bounce it still enough to see that type of retracment. Face it. The dollar is set to move higher, and metals are long overdue for a small spec shakeout. Get out of the way and thank me later.

Palladium, platinum and silver are the most common substitutes for gold that closely retain its desired properties.