Will Gold Win Out Against the US Dollar?

By Louis James

It is an essential impossibility to solve problems created by excess debt and artificial liquidity with more of the same. That’s our credo here at Casey Research, and the reason why we believe the gold price will turn around and not only go higher, but much, much higher.

While fellow investors around the world may not agree with gold loving contrarians like us, they are buyers: gold is up in euros and almost everything else, except the dollar.

The dollar’s rise has been strong and seems all but unstoppable. But look at it in big picture terms, as in the chart below, and ask yourself how sustainable the situation is.

I’m skeptical of reading too much into such charts. A peak like the one in the early 1980s would certainly take the USD much higher, and for several years to come. But still, this is an aberration. It’s not the new normal, but rather the new abnormal.

More to the point, gold hasn’t collapsed since the dollar began its latest surge last July. Just look at this one-year chart of gold vs. the US dollar. The dollar is up sharply (in EUR, as a proxy for everything-not-the-dollar and for comparability to the chart below), but gold is only moderately down.

Gold has been trading almost sideways over the last year.

That might seem like damnation by faint praise, but it’s critically important. With the USD skyrocketing and commodities plummeting, gold should be dropping like—well, like a gold balloon—if the critics are right and it has no practical value at all, except to dentists and fashion accessory designers.

But gold is money, the best store of wealth millennia of human experience have devised, and more and more people are recognizing this. Consider this chart of gold vs. the euro, which documents my contention that people outside the US do not see gold as a barbarous relic, but as an essential holding to safeguard their future.

Pretty much everywhere but in the US, gold is up, not down.

This chart supports my view that gold rebounded last November when it breached its 2013 low because international buyers saw that as an opportunity. The US has gone from primarily exporting inflation to exporting gold and inflation.

The fact that the dollar has risen faster than gold has dropped has important, positive effects on miners operating outside the US. If costs are paid in Canadian dollars, Mexican pesos, euros, or really hard-hit currencies like the Brazilian real, then those costs have just gone way down relative to the price of gold.

Of course, there’s a good chance that there’ll be more sell-offs before the gold bull resumes its charge… but they should be regarded as opportunities. Because once the gold market rises again, the best small-cap mining stocks have the potential to go vertical.

Watch eight industry experts discuss where we are in the gold cycle, and how to prepare your portfolio for gains of up to 500% or even 1,000%, in Casey’s recent online event, GOING VERTICAL. Click here for the video.


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Will The Dollar Ruin The Santa Claus Rally in the S&P 500?

Experienced traders recognize that volume typically dries up going into the holiday season. Light volume and the holiday seasonality generally push equity prices higher. The discussion of whether Santa Claus comes to Wall Street has arrived in earnest.

I do not envy Santa as he has the most arduous task of determining if Wall Street was naughty or nice. I suppose it depends on whether he reviews recent performance, or if past performance comes into play. Clearly coal will likely be found in a few stockings soon enough. If I were John Corzine, I would not expect to get a lump coal, but something far worse potentially.

In all seriousness, the bullishness has gotten pervasive in the media and economic data points such as unemployment and consumer credit have improved according to the government. One way to gauge investor sentiment is to look at the weekly advisor sentiment numbers courtesy of Bloomberg and Investor’s Intelligence.

According to this week’s advisor sentiment numbers, advisors who are bullish advanced to 47.4% from 44.2% last week. Bearish advisors dropped to 29.5% from 30.5% from the previous week. The 29.5% bearish data point matches a level that has not been seen in nearly 4 months. Bullishness has clearly become the leading expectation in the marketplace.

Only one asset has the opportunity to be “The Grinch” and ruin Christmas on Wall Street. If the U.S. Dollar rallies sharply, risk assets are certain to get hammered lower. In addition to the bullish tenor of market participants, most market pundits and gold bugs believe strongly that the U.S. Dollar is doomed fated for lower prices.

When I look at the long term momentum of a stock or commodity contract I will look at a monthly chart and plot the 12 month moving average against the price action. While it seems simple, equity and futures positions adhere to the 12 month moving average quite closely in many cases. The analysis is very simple as prices above the 12 month moving average equate to bullishness and prices below the moving average predict lower prices. The monthly chart of the Dollar Index futures is shown below:

As can be seen above, the Dollar Index futures are showing strength currently. The 12 month moving average is starting to flatten out which is also a bullish indicator. When looking at the daily time frame we can see that price action is trading inside a wedge pattern and is bouncing higher off of support:

An additional catalyst that could push the U.S. Dollar higher is the economic tragedy that is Europe. European political leaders need to come up with a series of strong solutions that will stabilize their economic crisis otherwise the Euro will weaken further. A weakening or potentially crashing Euro will push buyers back into the U.S. Dollar. This would in turn place downward pressure on equities and commodities.

S&P 500

On Thursday the S&P 500 flushed over 2% lower by the close as the European Central Bank disappointed investors with an expected 0.25% rate cut and no new bond purchase announcements. The bulls will tell you that the Thursday the week prior to monthly option expiration usually is volatile and price direction is generally in the opposite direction of the primary trend. We will find out next week whether that axiom holds true. The daily chart of the S&P 500 is shown below:

The strength of Thursday’s move is not going to easily be reversed. The European leaders need to shock the market with tangible decisions and launch a major offensive against their growing fiscal issues. If European leaders disappoint investors, the reaction to the news could be a violent selloff that leaves bulls flatfooted next week.

Those who are leaning long in size should consider that their trading capital is being leveraged on the hope that European leaders can come to a groundbreaking agreement. I will be in cash watching the price action in the S&P 500. However, once the dust settles and others have done the heavy lifting, I will likely get involved with a directional trade. Until then, I am just going to ponder if I were Santa, would Wall Street get a present or a lump of coal?

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J.W. Jones

Evidence Supports the Bears’ Case for the S&P 500

I am not one to discuss fundamentals or macro views, but this situation in Europe is beginning to morph into a media frenzy. Price action in the marketplace is changing rapidly in short periods of time based on the latest press releases coming from the Eurozone summit.

I cannot help but comment on the seemingly arbitrary actions coming from this high profile meeting. Nothing has happened that market participants were not already privy too. The European Union is going to strengthen their EFSF fund by levering it up roughly 4 : 1. I have yet to hear how exactly they plan on doing this, but this action was no surprise to anyone that has read an article about the sovereign debt crisis in the past month.

There was also discussion about backstopping European banks’ capital position. Since European banks are holding billions (Euros) of risky sovereign debt instruments, it would make sense that their capitalization is a primary concern of Eurozone leaders based on current fiscal conditions. I would argue that the banks should be well capitalized regardless of economic or fiscal conditions in order for a nation to have a strong, vibrant economy that has the potential to grow organically.

The final piece of this week’s political nonsense involves write-downs on Greek debt in the neighborhood of 50% – 60% in order to stabilize Greece’s debt to GDP ratio. Apparently Eurozone leaders want to structure the write down so as to avoid payouts by credit default swaps which act as insurance against default. How does a bond take a 50% – 60% valuation mark down without a creating an event that would trigger the payout of CDS swaps?

If a write down of that magnitude does not trigger the CDS swaps, then I would argue they are useless as a tool to hedge against the default risk carried by sovereign debt instruments. If the CDS swaps do not payout as projected by European politicians, the risk assumed by those purchasing government debt obligations around the world would be altered immediately.

The impact this might have on the future pricing of risk for government debt instruments could be extremely detrimental to their ability to raise funds in the private market. Additionally, the write downs would hurt European banks’ capital positions immediately. If the CDS swaps were to pay out, bank capital ratios would suffer as those who took on counter party risk would be forced to cover their obligations thereby straining capital positions even further potentially.

Price action today suggested that the equity markets approved of the package that European leaders were working on. However, the biggest push higher came when news was released that China was interested in purchasing high quality debt instruments as a means to help prop up poorly capitalized banks and sovereign nations in the Eurozone through an IMF facility.

The market did an immediate about face which saw the Dollar selloff while the S&P 500 rallied higher into the close reversing a great deal of Tuesday’s losses. Inquiring minds wish to know where we go from here? I would be lying if I said I knew for sure which direction Mr. Market favored, however that did not stop me from looking for possible clues.

It has been a while since I checked out the short-term momentum charts that are focused on the number of stocks in U.S. domestic equity markets that are trading above their 20 & 50 period moving averages. The charts below illustrate the current market momentum:

Equities Trading Above the 20 Period Moving Average

It is rather obvious that when we look at the number of stocks trading above their 20 period moving average that momentum is running quite high presently. This chart would indicate that in the short-term time frames equities are currently overbought.

Equities Trading Above the 50 Period Moving Average

A similar conclusion can be drawn when we look at the number of stocks trading above their 50 period moving averages. It is rather obvious at this point in time that in the short to intermediate term time frames, stocks are currently at overbought levels. This is not to say that stocks will not continue to work higher, but a pullback is becoming more and more likely.

Additional evidence that would support the possibility that a pullback is likely would be the  recent bottom being carved out in the price action of the U.S. Dollar Index. The U.S. Dollar has been under selling pressure since the beginning of October, but has recently started to show signs that it could be stabilizing and setting up to rally higher.

The daily chart of the U.S. Dollar Index is shown below:

The U.S. Dollar Index is sitting right at major support and is oversold based on historical price action. If the Dollar begins to push higher in coming days and weeks it is going to push equity prices considerably lower. Other risk assets such as gold, silver, and oil would also be negatively impacted by higher Dollar prices.

Members of my service know that I focus on several sectors to help give me a better idea about the broader equity markets. I regularly look at the financial sector (XLF), the Dow Jones Transportation Index (IYT), emerging markets (EEM), and the Russell 2000 Index (IWM) for clues about future price action in the S&P 500.

During my regular evening scan I noticed that all 4 sector/index ETF’s are trading at or near major overhead resistance. With the exception of the Dow Jones Transportation Index (IYT), the other 3 underlying assets have yet to breakout over their August 31^st highs. The significance of August 31^st is that is the date when the S&P 500 Index put in a major reversal right at the 1,230 price level before turning lower. It took nearly two months to regain the 1,230 level and its significance continues to hold sway.

The daily chart of IWM is shown below illustrating its failure to breakout over the August 31^st highs:

The chart above illustrates clearly that IWM has failed to breakout above the August 31^st highs. I am going to be watching IWM, XLF, & EEM closely in coming days to see if they are able to breakout similarly to the S&P 500. If they start to rollover, it will not be long before the S&P 500 likely follows suit.

Currently the underlying signals are arguing for lower prices in the short to intermediate term. While it is entirely possible that the S&P 500 rallies higher from here, it is without question that current market conditions are overbought in the short to intermediate terms.

Key sectors and indices are not showing follow through to the upside to help solidify the S&P 500′s recent break above the key 1,230 price level. Additionally, the U.S. Dollar Index is currently trading right at key support in addition to being oversold. At this time I am not playing the S&P 500 in either direction, but I will be watching the underlying price action in the U.S. Dollar Index closely. I will be watching for additional clues in the days ahead.

Market and headline risk is high presently.

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Chris Vermeulen & J.W. Jones

Weaker Euro Sends Crude Oil Lower, Dollar Higher

Crude oil was lower overnight due to profit taking and a weaker Euro as it consolidates some of this spring's rally. Stochastics and the RSI are diverging but are neutral to bullish signaling that additional gains are possible.

Day traders may start the regular trading session neutral as they watch the SP 500 closely to see if it will continue trading at the bottom of it's current bullish channel or if we get a serious break out to the downside. If we trade sharply below the channel crude oil will be sure to follow.

If July extends this spring's rally, the 38% retracement of the 2008-2009 decline crossing at 82.38 is the next upside target. Closes below the 20 day moving average crossing at 66.38 are needed to confirm that a short term top has been posted.

Monday's pivot point for crude oil is 71.82. Below that we are bearish, above the pivot we will play the bullish side.

First resistance is last Thursday's high crossing at 73.23
Second resistance is the 38% retracement level crossing at 82.38

First support is the 10 day moving average crossing at 69.73
Second support is the 20 day moving average crossing at 66.38

Crude Oil Rises As Dollar Continues To Show Weakness

"Crude Oil Rises as Dollar Drops Against Euro, Equities Gain"
Crude oil rose as the dollar fell to a four month low against the euro and the U.S. stocks increased for the first time in four days. Oil rose as much as 1.5 percent in New York after the dollar dipped against major currencies on speculation the U.S. may lose its AAA credit rating. Equities gained as unexpected profit at Sears Holdings Corp. overshadowed concern the government faces higher interest rates to finance the rescue of the financial industry......Complete Story

USO & Crude Oil On The Move Click Here

"Oil Market Turns to OPEC Advantage, But Pitfalls Abound"
Global oil markets have turned in OPEC's favor after months of drilling a hole in the cartel's coffers, but internal wrangling in the producer group could still cap recent oil price gains. The Organization of Petroleum Exporting Countries' deep production cuts over the past five months are beginning to whittle down a mountain of excess supply. World crude demand appears to be stabilizing and will get a top up with the start of the.....Complete Story

Is the Dollar in Trouble? Click Here

"Venezuela Oil Keeps Luring Bidders in Bets Chavez Isn’t Forever"
Chevron Corp. and Total SA are pursuing new Venezuelan oil projects after President Hugo Chavez tore up past agreements, seized assets of contractors and expelled producers that wouldn’t accept new terms. The strategy, producers and analysts say, is to tap crude reserves that Chavez touts as the world’s largest. Decisions to push ahead under a regime whose leader vows to “bury capitalism” are bets that the companies can buy enough time to outlast Chavez, said Peter Zeihan, a vice president at Stratfor, a geopolitical.....Complete Story

Crude Oil Higher, Lower Prices Still Likely Near Term

June crude oil was higher Sunday evening due to short covering as it consolidates some of last Friday's decline. As I write crude is up $1.74 at 58.10 well above our pivot point of 57.14. However, stochastics and the RSI have turned bearish signaling that sideways to lower prices are still possible near term.

More than ever we are pitted against the dollar. Professional traders expect the Euros rally against the dollar to be short lived for the near term, however government policies right now are based on making the dollar as weak as possible making another crude bull rally waiting right around the corner.

Closes below the 20 day moving average crossing at 54.07 are needed to confirm that a short term top has been posted.

If June renews this spring's rally, the reaction high crossing at 65.00 is the next upside target.

Monday's pivot point is 57.14

First resistance is last Tuesday's high crossing at 60.08.
Second resistance is the reaction high crossing at 65.00.

First support is last Friday's low crossing at 56.07.
Second support is the 20 day moving average crossing at 54.07.

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The June Dollar was lower overnight as it consolidates some of last Friday's rally but remains above the 75% retracement level of the December-March rally crossing at 827.50. Stochastics and the RSI are oversold but are turning bullish hinting that a short term low might be in or is near. Closes above the 10 day moving average crossing at 83.14 would temper the near term bearish outlook in the market.

If June renews the decline off April's high, the 87% retracement level of the December-March rally crossing at 81.49 is the next downside target.

First resistance is the 10 day moving average crossing at 83.14.
Second resistance is the 20 day moving average crossing at 84.25.

First support is last Wednesday's low crossing at 81.98.
Second support is the 87% retracement level crossing at 81.49.

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The June S&P 500 index was higher overnight due to short covering as it consolidates above support marked by the 20 day moving average crossing at 881.90. Stochastics and the RSI remain bearish signaling that sideways to lower prices are possible near term.

Closes below the 20 day moving average crossing at 881.90 would confirm that a short term top has been posted while opening the door for a larger degree decline this spring. Closes above the 10 day moving average crossing at 901.16 would temper the near term bearish outlook in the market.

Monday's pivot point, our line in the sand is 885.25

First resistance is the 10 day moving average crossing at 901.16
Second resistance is the reaction high crossing at 929.00

First support is the 20 day moving average crossing at 881.90
Second support is the 25% retracement, this spring's rally crossing at 862.80

The June S&P 500 Index was up 2.70 points. at 885.70 as of 6:02 AM CST. Overnight action sets the stage for a higher opening by the June S&P 500 index when the day sessio
n begins later this morning.


Today’s Stock Market Club Trading Triangles



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