The Dollar Rally: Will It End the Bull Market for Gold & Silver?

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It has become clear to us that the media and so many institutional analysts are going to keep talking the dollar up despite the lack of fundamental reasons. We feel that you will benefit most from a look at what lies ahead for the dollar and its fundamentals and what could take it higher, if it does rise.

This is a snippet from a recent issue of the Gold Forecaster with Subscriber-only parts excluded. We will not disclose our forecasts on the gold price except to Subscribers.

It has become clear to us that the media and so many institutional analysts are going to keep talking the dollar up despite the lack of fundamental reasons. We feel that you will benefit most from a look at what lies ahead for the dollar and its fundamentals and what could take it higher, if it does rise.

A Rally Is Due?

The main reason a rally in the dollar is being promoted is because it is due for a rally. The same is being touted for the Pound Sterling. It is certainly true that a price never moves in a straight line. It is also true that investors, buyers and sellers must see trade around all levels to ensure they are balanced and accept price levels as convincing. When the market sees a price 'spike' you can be sure that sellers will turn up to bring it down. The only time it stays there is when buyers and sellers feel that, that price is justified by them both.

However, please note that the price of the dollar is the main fulcrum of the currency world, a currency, unlike a share that is traded by an exchange. So its price doesn't move by buyers dominating one day and sellers the next. It stays in balance most of the time. That is why its fall from $1.23 to $1.51: €1 has been gradual. If it rises it is because of a distinct reason similar to a change of tide. So the concept of "just a rally" will not end the bull market for gold.

Is the € Worth More Than the Dollar?

When the dollar rises, gold traders on COMEX sell gold in such a related manner as to try to establish a direct link between the € and gold. Silver follows. Of late we have seen that relationship broken then followed again. As the gold price has risen if has also risen in the €, thus de-coupling from the dollar. But the actions of short-term traders keep returning to the day to day moves of the dollar against the €, perpetuating the belief that when the dollar rises against the €, the gold price falls.

When the € was first issued it was roughly a 1:1 relationship to the USD. It is now $1.4254: €1 this is a rise in the € of 42.5%. In that time gold has gone from $275 to $1,215 and increase of 440%. Do we now expect the gold price to move in line with the €? Why should it?

The Eurozone and the U.S. are at similar levels of development; their economies are moving in a similar path. The dollar and the € are paper currencies are of a similar structure and reliant on similarly driven central banks. They have the same economic and currency goals. They are relatively inter-dependent. What will ail the one will ail the other. Hence the rise of one against the other is similar to a race where one runner is slightly ahead of the other. They are in the same race and the performance of one is not detrimental to the other. But the gold price is in an entirely different race, going a different way, moved by different drivers. We believe that this dollar; € and dollar: Gold ratio will fall away over time, just as in the past the oil: gold price fell away

Surplus Holders Will Keep It High?

Of far greater pertinence is the attitude of dollar surplus holders to the dollar. These are caught in a cleft stick, knowing that if they sold their dollar surpluses that they would inflict losses in these holdings on themselves in the process of undermining not just the U.S. but the global economy. But each of these surplus holders in a different position regarding the dollar. All of them are caught in the cleft stick, but in this they will react in different ways:
  1. O.P.E.C. oil producers are dependent on the States for the security of their sovereignty. The House of Saud dare not reject the dollar oil price or they will lose the physical protection of the U.S. as will all those Western and Northern countries of the Persian Gulf. So they can only influence the dollar oil price through supply influence to ameliorate the state of the dollar. However, this may be changing as we now hear the news of a new Gulf currency that may be used to price oil in. If this does happen, then a major nail will have been driven into the coffin of the dollar as the global reserve currency.

  2. Russia needs to maximize oil income to keep itself economically sound. So it will accept the Yuan from China but won't reject the dollar payments from other countries. It is diversifying reserves as far as it can without damaging the dollar exchange rate [such as into gold] and would love to jettison the dollar, but for the sake of the value of its reserves and the stability of the world's currency markets, including the Ruble market, it won't. As one Treasury Official said, the dollar may be our currency, but it's your problem.

  3. China is stuck with around $3 trillion in its reserves, firmly snared in the dollar trap. It is unhappy with this and is diversifying as far as it can [including into gold]. Its unshakeable answer is to peg the Yuan to the dollar and reap the benefits of sucking the manufacturing out of the States and selling it cheap goods, which are the first to be bought in a recovery. There will be no loosening of the 'peg' until the problem of China's dollar reserves is solved. It is therefore turning the disadvantage into an advantage that is bleeding the U.S. of its strength. By doing this, the advantage of a weakening dollar to the States is neutralized. President Obama's visit to China simply demonstrated that the Chinese were not prepared to budge on this. However, the Chinese did concede that they would not dump their dollars on the market. This would cause such disarray globally that the dollar would collapse, but so may the global economy.

  4. Other nations, will attempt to absorb the weakening dollar and where this is hurting them too much, will attempt competitive devaluations to keep some stability in their exchange rate with the dollar, where their trade levels with the States require it. €-dependent countries will move with the €.
Overall the world will continue to accept the dollar and to some extent diversify into gold to "counter the swings in the dollar."

Will a Recovery Spark Dollar Strength?

When the U.S. was at its strongest economically it drew in imports from the rest of the world particularly China and the cheaper producing nations. Consumers in the States are more aware than ever of the buying power of the dollar in their shops. As their disposable income rises they will spend it on the cheaper goods that provide the same needs as the more expensive, usually home produced equivalent. It will only be when the States imposes tariffs on Chinese goods that this will change. At the moment this is unlikely. If it does happen, expect similar barriers to be set up for U.S. goods entering China. With China moving to economic self-sufficiency, it is becoming less vulnerable to dropping exports or potential tariff barriers.

So we do believe that as the U.S. recovery accelerates, imports will grow rapidly and so will its Trade deficit, thus undermining the exchange rate of the dollar on international foreign exchanges still further.

Will Gold Decouple from the Dollar?

We have seen it do so many times and so expect it to do so not just again but eventually to be weaned off this relationship as short-term traders are made to suffer because of holding to it.

With the global economy struggling to recover and with so many dangers laying ahead, each one of them threatening uncertainty, instability and with international tensions growing, it is clear to most that the gold price is rising against all of these worries. It is not rising because of a falling dollar. It will not fall, except short-term, against a rising dollar. It would therefore be wrong to isolate the dollar as the reason why the gold price either rises or falls, but it will continue to be the reason why the media in general records such rises and falls, because it is easy and story-worthy to do so.

The Impact on the Gold Price of a Dollar Rally or Fall—Subscribers only

We sent out a review of the gold market to Subscribers only, which reveals why the gold price is being held well above $1,000, where it will go next and how the gold market has changed shape due to the changes in overall central bank policies, from selling gold to buying gold. Subscribers should ask for this report and it will be forwarded to them, so perhaps you should subscribe?

Gold Forecaster
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Legal Notice / Disclaimer
This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina only and are subject to change without notice. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.

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