Introduction
On 9/10, I published a missive expressing incremental optimism about gold, incremental bearishness on the dollar. Here's a brief update.
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An excerpt from the 9/10 missive ("US Dollar/Physical Gold"):
"...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 [9/9] of just under 89.
"The fundamentals currently underpinning the dollar are not very healthy...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.
"I have a hunch...the Dollar Index's trading range could be on the verge of widening [by virtue of lower levels]...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."
Between 9/10 and last Friday, gold was up about 4.2% ($17/oz.), while the Dollar Index was down approximately 2.0%, to 87.09 on Friday. Neither are dramatic moves, but they are consistent with the direction and the rough timing expressed above.
On 7/20, in my "Midyear Economic and Market Review," I opined a value for physical gold of $475 to $500 by the end of the year. To achieve this range, bullion would have to rise about 13.4% to 19.3% by 12/31, which is certainly ambitions. Nevertheless, I continue to believe it is possible. Success hinges on the time and effort required to take out the formidable resistance that exists in the low $430s.
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A LOOK AT GOLD, THE PHILADELPHIA GOLD/
SILVER INDEX ("XAU"), THE DJIA AND THE
FRB DOLLAR INDEX FROM 12/31/99 FORWARD
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---------- Index ---------
Comex FRB (12/31/99 = 100.00)
Gold* $ --------------------------
Date ($s) "XAU" DJIA Index Comex "XAU" DJIA $
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2004
10/15 419 99.89 9933 87.09 144.98 146.96 86.40 85.53
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4Q2004 to Date 0.0% -2.0% -1.5% -0.3%
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2004 to Date 0.7% -8.2% -5.0% 0.2%
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09/30 419 101.95 10080 87.36 144.98 149.98 87.68 85.80
06/30 393 86.29 10435 88.80 135.99 126.95 90.76 87.21
03/31 427 104.95 10358 87.61 147.75 154.41 90.09 86.04
2003
12/31 416 108.84 10454 86.92 143.94 160.13 90.93 85.37
2002
12/31 348 76.76 8342 101.85 120.42 112.93 72.56 100.03
2001
12/31 279 54.43 10022 116.75 96.54 80.08 87.17 114.66
2000
12/31 272 51.41 10787 109.56 94.12 75.64 93.82 107.60
1999
12/31 289 67.97 11497 101.82 <-------- 100.00 -------->
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*Spot-month contract.
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