For years, analysts said that if the dollar dropped below 79 on the US$ Index it could spiral downward in a precipitous drop. Well, the dollar is trading below 79 and fears of a big dollar decline are starting to spread. And, rightfully so.
The dollar is in serious trouble because of decades of deficit spending and the running up of the national debt. Since Bush took office, the national debt has more than doubled. A declining dollar, of course, would be bullish for the precious metals.
James Turk, longtime monetary analyst, has posted telling graphs for gold, silver, the dollar, and the euro. Gold has broken to the upside out of a consolidation pennant that started in May and is now trading at its highest level since January 21, 1980. Yet gold receives little attention by the media, further evidence that were still in the early stages of this precious metals bull market.
Silver has not matched gold’s performance since March. Under performed is the term now widely used to describe silver’s price action. However, Turk notes that silver has broken above the downtrend line going back to the May 2006 top, supporting the position that gold’s uptrend is a significant event.
Turk sees the decline in the dollar as ‘relentless’? that downside momentum is starting to build, and that a rout could be ahead. He also notes that gold has broken out against the euro, which I consider strong evidence that gold is in a strong bull market.
Meanwhile, silverseek.com has posted a Ted Butler article on gold and silver. Butler is legendary in silver circles for his bullish articles on silver, which are always interesting. This article is especially interesting because he is short-term bearish on gold due to the large commercial traders’ short position in gold.
As he often does, Butler lambasts the bullion banks for their actions in the gold and silver markets. Manipulation is a word Butler often uses. He fears that the COT (commitment of large commercial traders) position in gold portends downside action. When it comes to silver, however, he has another view.
The COT in silver is not nearly as large as it has been in the past, evidence to Butler that the large traders are not as willing to take big short positions in silver as they once were. Still, he sees gold as vulnerable in the short run.
I don’t know what gold and silver will do in the short run, but in the long run I see them going higher, much higher. Before you jump of off gold because of Butler’s analysis, remember that when gold tacked on $300 from the fall of 2005 to May 2006, the large commercial traders held huge short positions in gold and suffered horrendous losses. During the same time, silver doubled in price from $7 to $14, and the bullion houses were short millions of ounces of silver, taking big losses there.
I suspect that the big bullion houses will suffer similar losses before this bull market is over because they continue to play the short side of the market, but this time? We’ll just have to wait and see.
Eight reasons for being bullish on gold
At the recent Denver Gold Forum, Dr. Martin Murenbeeld, chief economist of the Dundee Group of Companies, gave eight reasons for being bullish on gold. The first three had to do with the dollar.
The first is because monetary reflation is happening due to the liquidity crisis.
The second is the U.S. dollar’s continued devaluation.
The third reason is the excessive of U.S. dollar reserves in Asia. “Asia holds more than $3 trillion in exchange reserves but ‘next to nothing’ in gold reserves. If the nations would want out of those exchange reserves, ‘hopefully they turn to gold.'”
I have no idea why Murenbeeld said “hopefully.” Gold has been standard monetary reserve since paper currencies were developed. If the Asians want to turn their dollars into hard assets, gold is the logical choice. For those who think that the euro is the dollar’s replacement, remember the euro is only another paper currency, which can be created at will just like the dollar.