The US Dollar Breaks Down

2009-MAY-10

Last week the US dollar dropped 2.7% against both the Euro and the Swiss franc. The dollar fell 2.4% against the basket of currencies comprising the US Dollar Index.

The dollar has been in a bear market rally since last July. Last week’s decline is further evidence that this bear market rally has ended, which is clear from the following chart.

The last bear market rally in the US Dollar Index topped out on November 16, 2005 at 92.33 (green dashed line). The current bear market climbed to only 89.11, well below the previous peak, which is a clear sign of weakness. The pattern of lower highs therefore remains intact, confirming that this index is still declining within a long-term downtrend.

Importantly, we can see that the US Dollar Index has now broken down from the uptrend channel marking the present bear market rally. Then on Friday it easily knifed down through its 200-day moving average, currently at 83.01. Next support for the index rests around 80, which marked the December 2004 low (red dashed line).

It is too early to say that the US Dollar Index is headed for a new all-time low. It may be that this index is just moving into a broad trading range, say, between 89.11 and the black dashed line. After all, the Euro and other currencies that make up this index are not in much better shape than the dollar. In other words, the purchasing power of all national currencies is being inflated away, which leads me to gold and the following chart.

The reverse ‘head & shoulders’ pattern discussed in the last alert remains intact. More importantly, gold has broken above the short-term downtrend line going back to the February 2009 high. However, the gold cartel seems to have drawn a ‘line in the sand’ at $915, and so far has stopped gold’s advance.

For example, on Thursday gold climbed to $920, only to be beaten back by a barrage of selling. Gold closed in New York up only $4.50 that day ending exactly at $915, on huge volume and a massive surge in open interest of approximately 38 tonnes. In short, new buying was met by determined gold cartel selling, which no doubt will be reflected by an increase in the short position of commercial traders in the Commitment of Traders Report to be released this Friday.

The antics of the gold cartel are explained in my article entitled “A Short History of the Gold Cartel”. It is unfortunate that the government-directed gold cartel prevents gold from trading as it would trade if it were in a free-market. But the important point to remember is that in the end, gold always wins, i.e., its price inevitably climbs higher as fiat currency is debased. Gold is always the measuring stick – the standard – by which fiat currency is gauged. There is no doubt that the dollar is being debased, so we can therefore logically conclude that inevitably gold will climb higher.