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| US Dollar/Physical Gold - Sep. 10, 2004 |
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Pending: a lower dollar, higher gold?
Essentially, the dollar's exchange-rate value, as measured by the Dollar Index, has done nothing, on balance, for the last few months. It has been range bound in roughly the 87.50 to 90 area, with a close yesterday of just under 89.
The fundamentals currently underpinning the dollar are not very healthy, to say the least! In a world of genuine free markets, it is entirely reasonable to believe the dollar would stand at lower levels, probably significantly lower levels at that. But the mother of all carry trades, the mammoth absorption of dollars by foreign central banks, then the recycling of the dollars into US Treasury obligations, has kept the greenback well bid. It certainly has not hurt the price of shorter-dated Treasury securities, either.
But I have a hunch the situation is on the brink of change, at least a little change.
I suspect that the Dollar Index's trading range could be on the verge of widening, by virtue of values that are lower than those experienced in recent months. The 85 area is an inviting technical target. But at minimum, I think the greenback is about to take a shot at the low end of what has been the trading range of recent months -- therefore, a shot at the middle 87 area.
Thanks again to carry trade considerations, the inverse relationship between the dollar's value and that of physical gold has been exceptionally tight. Thus, I would fully expect that if the dollar were only to revisit the bottom of the existing trading range, it would produce a sizable rally in gold. Particularly so, with a technical condition in gold that I assess as having gotten increasingly stronger.
And what constitutes "sizable?" I would think that something in the $20 to $30 range would be doable. In turn, the higher number would leave bullion poised for a shot at a new recovery high.
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