An Update on Gold vs. the Crappy US$

 

 

Trader Scott’s Market Blog

February 23, 2017

There is a generally accepted (and usually) correct belief in the inverse relationship between the US$ and gold. This belief is ingrained and with good reason. The basic $ reserve currency status with the Bretton Woods “agreement” has lasted over 70 years. This agreement was based on having “faith” in both the $ and gold. But that whole time they were at odds, and while Bretton Woods basically ended in 1971 with Richard (Tricky Dick) Nixon, the $ reserve status has continued. So the battle between the $ and gold has been going on a long time, but only one of those will win. And it isn’t the crappy US$ which will prevail.

The correlation between gold and the $ is generally in force, but there can be some serious deviations from this relationship. And it’s usually at the best buying/selling opportunities when the relationship breaks down. The previous post shown below lays out theserious breakdown in the relationship between gold and the $ in the big bottoming process in gold/big topping process in the US$ in the 1999-2001 time frame. It’s my belief that is what is generally happening in the current time frame, but with a twist. The huge problems with the Euro will cause capital to move into both the $ and the PMs (and US Treasuries). And the more important twist – the coming end of the US$’s official reserve currency status. So what will replace it, or will we even have one official reserve currency. “Ex-con” Christine Lagarde and the IMF would like their stupid SDR(Special Drawing Rights) to be the fiat replacement. A better acronym would have been STP (Special Toilet Paper). But what’s more likely for a monetary reset will beto have several options/a basket, and gold would be a part of that. In other words, gold is slowly regaining its’ role as a currency. So as the world’s political problems and currency problems continue to increase, both gold and the $ will generally benefit, with ebbs and flows. But King Dollar’s days are numbered. And when combined with the death of the belief in central bankers’ omnipotence, the future for gold is very bright, especially looking out to the second half of 2017 and beyond.

 

We hear alot of stories about the relationship between the US$ and gold. I have tried to debunk some of them. There is certainly a relationship between the two, but the correlation is far from exact. First let’s take a look at the big picture US$and gold. Look at where gold and the $ were in 1999. And then compare it to we are now. Not a great correlation. Certainly part of the situation was the huge 19 1/2 year bear market/trading range into the 1999 low which is a reason for the inexact correlation. That bottoming process set off a huge bull run into September 2011 of almost 8x. Gold was incredibly cheap around year 2000, as many miners were one year ago, and still are. There’s alot of work, planning, and analyzing that goes into this than just the ridiculous notion of gold is the reverse side of the US$.

Here’s a detailed view of the bottoming process in gold from the initial 1999 low (#1), and then comparing it to the topping process in the $ in the same time frame. We can then use this for the current time frame – not as an exact blueprint, but as a general road map of what has actually occurred in the past in major bottoming and topping processes. We will hear many different viewpoints of what gold (supposedly) does vs. the $, but here is what has actually happened. There are several things to notice. The initial 1999 low in gold was at around $250, and yet the Dollar Index (#1) then was almost exactly where it is today. Gold hit it’s intraday low in 1999, well before the $ preliminary topping process (#4) began. The big upthrust and major signs of strength (SOS) (#2 and #3) occurred well before the topping process in the $. The topping process in the $ really took hold around #5, while gold continued to drift lower – rallies and reactions/retesting. And gold’s final retests (#7 and #8), with volatility picking up, and yet the US$ still went to another new high within its’ topping process. And that is important, because gold can bottom before the actual intraday high in the $ bull market being set – as long as the topping process has begun, So then after #8, there are three more powerful SOSes which showed up over the next year. It’s important to note, a big sign of strength is warning of a change of character in a market, almost like a “confirmation” of where a market is eventually headed later. But at the same time, they perversely are also a warning of an impending shorter term top to appear soon. And these reactions usually retest back down to, or below, where the SOS started. At #10, when the US$ did its’ final retest high in the topping process, look at where gold was. It was already ‘sniffing out” the new $ bear market. That $ topping process took arond 24 months to unfold.

The situation in the $ now compared to 2000 is quite similar. Both of them had large accumulation areas, preceding the bull, of about 8 years. They both then rallied and began trading in this range between 103-90, including a large reaction down to set a spring low. But there are some big differences. The US/global debt situation, and the bank derivatives situation was much smaller in 2000. And in 2000, bonds were still in a massive bull market. These will all have big effects on all markets, not just currencies. But specifically for the US$, the effects will likely be bullish initially, but eventually quite bearish. There is tremendous bullishness right now in the $ right as it’s sitting in a pretty big resistance zone. There is also alot of hope in the new Administration. There was alot of hope 16 years ago for the previous Republican Administration of George (Hanging Chad) Bush, but that didn’t stop the $ from putting in a major top. I would expect a similar situation early on with this President-elect. Gold will begin to “sniff out” a topping process in the $, and it will begin take pressure off of it. And there are situations coming up this year in Europe, where gold and the $ can rally together.

 

 

 

 

About

Trader ScottTrader Scott has been involved with markets for over twenty years. Initially he was an individual floor trader and member of the Midwest Stock Exchange, which then led to a much better opportunity at the Chicago Board Options Exchange. By his early 30’s, he had become very successful in markets, but a health situation caused him to back away from the grind of being a full time floor trader. During this time away from markets, Scott was completely focused on educating himself about true overall health and natural healing which remains a passion to this day.Scott returned to markets over fifteen years ago where he continues as an independent trader.



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'Trader Scott’s Market Blog – An Update on Gold vs. the Crappy US$ – February 23, 2017' have 16 comments

  1. February 24, 2017 @ 3:15 am Q

    “And the more important twist – the coming end of the US$’s official reserve currency status. So what will replace it, or will we even have one official reserve currency. “Ex-con” Christine Lagarde and the IMF would like their stupid SDR (Special Drawing Rights) to be the fiat replacement. A better acronym would have been STP (Special Toilet Paper). But what’s more likely for a monetary reset will be to have several options/a basket, and gold would be a part of that. In other words, gold is slowly regaining its’ role as a currency. So as the world’s political problems and currency problems continue to increase, both gold and the $ will generally benefit, with ebbs and flows. But King Dollar’s days are numbered. And when combined with the death of the belief in central bankers’ omnipotence, the future for gold is very bright, especially looking out to the second half of 2017 and beyond.”
    Pure Gold Bro
    ;-)
    Q

    Reply

  2. February 24, 2017 @ 9:11 am Jon

    Notable divergence of the miners yesterday with gold into 1250-1260 resistance. Hmmm…

    Reply

    • February 24, 2017 @ 9:29 am traderscott

      And again today, right back into resistance.

      Reply

      • February 24, 2017 @ 9:44 am Jon

        Sold out of the money covered calls yesterday morning on GDX-25.5 strike and GDXJ-43.5 strike, as well as DUST at 26.4. The pullback that refreshes…

        Reply

        • February 24, 2017 @ 2:48 pm traderscott

          So far, so good Jon.

          Reply

          • February 24, 2017 @ 3:22 pm Jon

            Looks like $/Y wants to test 111.509. Possible support stop run before reversal. Should spike gold well above 1260 before reversal. Miners are sniffing it out…

  3. February 24, 2017 @ 9:35 am traderscott

    With the general equity market, the thing to watch is the pickup in volume on the selling. And mental note – today gold, bonds, and the $ all up. That’s the alignment I’ve been talking about. It’s early on with this and micromanaging it, but it should be watched.

    Reply

    • February 24, 2017 @ 1:21 pm The Seer

      Hi
      So sssllloooowwww the mining stocks. I am a patient investor but this is even getting to me . . .
      Your report is encouraging . . . . I know the trend is up. Wondering if “gold bugs” have been
      shaken off, have invested their cash, or what . . . . not the volume like last Spring . . . .

      Reply

      • February 24, 2017 @ 1:54 pm traderscott

        A big problem in markets, which took me a long time to overcome, is not overthinking it. And as opposed to most people who focus on the unknowable outcome, but ignore the true opportunities when they’re available. As I’ve repeated so many times, and short term trading aside, the big trend is up. That’s by far the main issue. Others disagree, fine. But my focus is to wait for the big backups to buy, and taking some profits here and there. If your approach is the bigger picture, focusing on the the day to day weirdness is a killer. But it’s one reason I short term trade, because there are opportunities in that weirdness which are purely technical in nature. Like today’s gaps.

        Reply

      • February 24, 2017 @ 2:06 pm Jon

        The miners seasonally make a low around the 12th trading day of March and are weak June-July. Last year was exceptional out of the generational lows, but March was still a consolidation month for the miners…

        Reply

        • February 24, 2017 @ 2:41 pm The Seer

          Sometimes people sell March early April to pay their 4/15 taxes, too.

          Reply

    • February 24, 2017 @ 2:40 pm The Seer

      I agree – I think we need to weight more the equity markets falling make up for dollar up against gold. Down equity markets gold goes up. If there is a huge black Mon event though = margin calls that can effect mining stocks for a few days but they bounce back quickly. Thank you for all the time and $ you are putting to offering this site and community! Much appreciated.

      Reply

      • February 24, 2017 @ 2:43 pm traderscott

        Just be careful with thinking equity markets down/gold up. That correlation is iffy. In my scenario down the road, stocks/PMs/commodities are all in bull markets.

        Reply

        • February 24, 2017 @ 3:21 pm The Seer

          10 year 2.32 – early people moving from equities into bonds today.
          I do hold more physical than miners – the physical side doing better.
          Newcomers would move to physical. Losing trust in banks and brokerages.

          Reply

          • February 24, 2017 @ 3:25 pm traderscott

            That is a serious consideration Seer – agreed about the brokerages. As to bonds, you guys know my view of bonds – am long since 12/1. I’ve left that TLT chart many times. It somehow became contrarian to be bullish on bonds.


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