"The idea that gold can only move inversely to the greenback is a myth."

Hope is a pleasant acquaintance, but an unsafe friend - Thomas Chandler Haliburton
I've received a number of e-mails over the last week asking me, better yet warning me about decoupling. The principal culprits are gold and the Dow, as well as gold and the dollar. Bloomberg and CNBC go on and on about gold moving inversely to the dollar and everybody listens to them as if it were gospel. What they don't know is that these TV experts are years behind the curve. There is no doubt that gold is rising in terms of every major currency in the world, but what is less known is that it rallies with or against the dollar. With respect to the supposed link between gold and the U.S. dollar, I want you to focus your attention on these two charts. First, let's look at an 11-month daily chart for gold.

$GOLD 11/29/10

And now the same chart for the U.S. dollar.

$USD 11/29/10

You can see that gold rallied nicely from early February and on into June, as did the dollar. The dollar then staged a sharp decline while gold consolidated. Lately the U.S. dollar turned up in November and gold is also trading higher. The idea that gold can only move inversely to the greenback is a myth, and I could show you good examples going all the way back to 2005 where gold rallied with the U.S. dollar.

Now let's take a good look at the same 11-month daily chart for the Dow.

$INDU 11/29/10

Here you can see that the Dow rallied sharply from early February until late April, as did gold! The Dow also rallied sharply from September into November just like gold did. On the other hand, the Dow turned sharply lower from May through July while gold crept higher. Finally, over the last two weeks the Dow has weakened while gold is clawing its way higher. Many investors are worried about what will happen to the price of gold if the Dow collapses. The worst-case scenario is a kneejerk reaction to the down side as investors scramble for liquidity, but gold is a safe haven and a store of wealth, so it must head higher if the Dow falters.

Now I want to continue discussing the Dow in relation to what happened yesterday and what is going on this morning. The Dow topped on November 5 with an 11,444.08 closing high. It came exactly 75 days for the July bottom and is a derivative of the 90-day cycle that has dominated the stock market for years.

$INDU 11/30/10

Once we saw that top, we informed readers that there was a chance the market could decline to November 29, completing the 90-days, and then turn up again. Yesterday just happened to see the intraday low for the 15-day move down at 10,929.28 and may have completed the 90-day cycle.

Both the Dow and the Transports made lower lows early in yesterday's session and then at 10:30 a.m. the Transports began to slowly climb higher. The Dow meanwhile stayed fairly close to its intraday low at 10,929 until 1:30 pm. I should add that the Transports topped at their November 8 closing high of 4,924.46 and then followed the Dow lower but not with the same conviction. Yesterday after being down as much as 2%, they turned and were in positive territory by 3:30 pm, closing out the session at 4,896.10 and within 28 points of their November 8 closing high. As the Transports hit positive territory yesterday, the Dow came all the way back to finish the day at 11,053 and more than 100 points above its respective intraday low. With all of this in mind, I am now watching a number of things, including:
  • I want to see if the Dow can close below the November 16 closing low of 11,023.50;
  • Will the Dow be able to move below yesterday's intraday low of 10,929.28 on the sixteenth day (or later);
  • Can the Transports make an unconfirmed new closing high above 4,924.46 and what does the non-confirmation mean; and
  • Will today turn out to be a higher low in the Dow.
If the Dow fails to move lower here and now, then I could make a very good case for a continuation of the run-up to the next level of resistance at 12,246.

There is the possibility that the Transports could make a higher unconfirmed high, and then both the indexes could turn down. Today the Transports again fell with the Dow, but not as much, and now they are both edging higher. With that said it's early and the close is what really matters. I am convinced we are at a crossroads today with stocks. If yesterday's intraday low holds, stock prices should go higher for a month, commodities prices will go with them and gold goes a lot higher. If stocks break lower here today, or tomorrow at the latest, commodities go down with them, the dollar and bonds move somewhat higher over the short run, and gold goes higher. Either way, gold wins—it's just a question of degree. Meanwhile at 10:15 a.m. EST the spot gold is up $16.70 at 1,384.00 while commodities are mixed to lower, the Dow is down and the dollar is higher yet again. If you listen to Bloomberg gold should be down $20. Today, but fortunately gold doesn't own a TV and if it did it would more than likely be watching the fishing channel.

Anthony Stills
[email protected]

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