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Bullion vs. the Dollar: Three Scenarios

By Rick Ackerman Posted on January 9, 2013, 12:01 am EST Last Updated January 9, 2013, 3:05 am EST

The U.S. dollar showed its first sign of life in nearly a month last week when it rallied above some distinctive price peaks on the daily chart. The trend bears watching, since any significant upside progress from here would put pressure on gold and silver quotes. How likely is this to occur? The chart below leaves the matter unsettled, at least for now. Traditional chartists will see a bearish head-and-shoulders formation in the making. If it pans out in textbook fashion, that would of course be bullish for precious metals.  We think this is the least likely of several scenarios for two reasons: 1) head-and-shoulders patterns are everywhere we want to find them, too popular for their own good; and, 2) this particular one looks too fetching to do what we expect it to do.

More likely, in our opinion, is a prolonged slog higher for the dollar over the next 6-8 weeks, with a modest upward slope that hugs the dotted red trendline.  This would be congruent with a forecast we aired a couple of months ago calling for range-trading in gold from around $1480 to $1800 between now and early 2014.

Most Bullish for USD

Which brings us to the scenario most bullish for the dollar, and therefore least bullish for precious metals. According to our Hidden Pivot Method of analysis, sustainable rallies nearly always begin with an upthrust exceeding two prior peaks, an “internal” and an “external.”   In the chart above, these peaks are labeled, respectively, #1 and #2.  However, more than merely exceeding both highs, the rally would have to do so without pulling back significantly after the first high is surpassed. Another way of saying it is that if bulls can get past peak #1, they must top #2 as well without pausing for breath. Were this to occur, you could kiss the head-and-shoulders pattern good-bye, and with it the prospect of a strong uptrend in bullion prices for perhaps another month or two.

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  • Buster January 9, 2013, 2:51 pm

    Back around 2000/2001 I started recommending to friends & colleagues to buy precious metals because of the inevitability of financial turmoil on a monumental scale. I’m sure many here have experienced the same point of realization & subsequent ridicule for such a non mainstream view of the world after having dared to peek behind the wizards curtain. I sometimes hear from some of these same people who found my worldview bizarre & have noticed a very definite shift. Now I even get asked for some quick investment advise, as the legend of my insights lingers on. The trouble is, the more one understands, the more one realizes there are no quick or simple answers. Should I buy Gold & Silver? I reply the time to buy was when it was shouting to be bought & no-one wanted to listen, at $267,close to when the financial genius Gordon Brown was giving away the UK’s gold reserves to who knows who??? But the sheeple mentality prefers to stay with the flock & follow the conventional wisdom, all packaged up by snakes in suits who’ll use sweet words to coax them into the fleecing pen, or worse.
    I don’t apply my mind to investments too much now for a number of reasons, not least of which is the apparent futility of it in the grand scheme of things. The powers that be have lied about tomorrow so invest in today, could sum up my current investment view. I expect the metals to eventually go much higher, but expect a tax & cashless money structure in place to rob back the gains of the wiser early investors in physical metal.
    In summation of the current & developing circumstances, my best financial advice to any in a position to sit the game out, would be sell up & move somewhere much cheaper, eg. UK to Spain, bank the difference & enjoy the simple life whilst you can. The rest is all for vanity & futility.

    • Oregon January 9, 2013, 6:47 pm

      Buster,
      Similar experience here. I jumped in around gold $550; must have been around 2005. At that time I was told by financial advisors that I was crazy; that gold was a poor investment and overbought. Been hearing that kind of talk ever since.

      I totally agree about the tax/ cashless scenario. Case in point: Our fair state is well known for high quality production of a certain federally controlled crop. Here it is somewhat managed by the state as ‘medicine’. There have been a number of recent articles in the local paper about the black market system and economy that has grown up around said crop. One reporter highlighted trade of the crop through the parcel services; crop sent out, money sent back. To combat this ‘evil’ local law enforcement has assigned a dog and handler to sniff out the controlled substance leaving the airport and also currency coming in. A sheriff’s deputy was quoted, “If you want to slow down the dealers you get their weed, but if you really want to hurt them you get their money.” Typical knight on the white horse lawman. The reporter went on to note the recent confiscation of $17,000.00 in cash that was addressed to a local woman. In this case the local authorities took the money and never notified the woman of any action. She never received her package and had to go looking for it. The deputy claims that no legal transaction would involve sending thousands of dollars in cash by parcel service.

      On the surface most rational people would agree with the deputy; it’s not normal to send thousands of dollars by parcel service. But according to the US Mail it’s not illegal. Doesn’t it say on every bill, “Legal tender for all debts; public or private”? Add the fact that they are just taking the money without notifying the sender or receiver and it seems criminal. The pigs have no proof of illegal activity, there was no trial, no conviction.

      What really struck me after reading the article was how belligerent the deputy was. He doesn’t realize that yes, by taking the money they are hurting the dealers, if in fact all the money is dealer money, but they are also hurting the whole local economy. We have a local economy especially hurt by the construction bust and are struggling to find any footing to replace it. What small time pot growers are really saving their money? They are like welfare recipients, almost every penny gets poured right back into local stores, restaurants, and services.

      I know that my point is moot since it is technically an illegal trade, however, I needed to know where the money was going. If all the money was going to local children’s charity I would find the practice tolerable, but no, turns out the pigs keep it all for ‘new equipment’.

      So there we have it. A bunch of shortsighted pigs already sucking off the taxpayers tit, who then confiscate ‘legal tender’ and act as judge and jury in order to fill their own coffers, while simultaneously robbing the local economy of valuable out of state dollars.

      To get back on the subject… those who invested in physical gold, or any other asset that doesn’t have a federal (reserve) stamp of approval on it are going to have a hard time realizing gains without the full scrutiny of the taxman. I think we are waking up to the fact that these supposed wars on drugs, tax-dodgers, and terror, are really wars for assets. Unless you are the ‘Gar-bear’, in which case, tout est parfait!

      I appreciate the advise to get out while we can, and maybe my wife or kids will be smart enough to do that, but I will be here till the last bullet flies, or more likely till my last penny is gone. I just don’t want to be anywhere else.

    • gary leibowitz January 10, 2013, 12:44 am

      I feel Gold can only go to perhaps 3,000 oz. if deflation is the end-game. If you believe, like me, that deflation, no matter how severe, will eventually be replaced by run-a-way inflation, the prospects for 7,000 or beyond is possible. You will need a strong stomach going forward since I believe we will have huge corrections along the way. I am still expecting a slow drawn out correction in stocks till next month, and could see Gold reacting in similar manner.

      I am now waiting to see if my expected timetable coincides with reality. Most last hurrahs happen in a spike move. If early February does show the SPX around 1395 I will be placing my double up bet. The last 3 months from February on should be a huge move to perhaps 1650. A great betting opportunity to “time” the bull spike and subsequent bear run. Please note this is “only” my personal expectations. The odds however of getting the timing right are not great. On can hope to guess correctly.

      As for the long term prospects for Gold, I do believe if it goes much higher than say 7,000 world governments might confiscate or place some arbitrary ceiling on the price. Just a hunch.

    • Duane January 17, 2013, 4:38 pm

      Buster,
      I don’t know if you will revisit this post but I have been wanting to get in touch with you since your Spain post a while back. One of my best friends lives in Altea near you and I have liquidated and am planning to move there from Texas with the kids in June for 6 months to a year to see if we might be interested in purchasing something there. Just wanted your feedback and ideas on purchasing, duration of stay without visa (I already have my empadron and NIE at my friends place continuously since 2003), and avioding some red tape issues as well as buying from banks/cajas as opposed to individual sellers. I have been reading a lot of articles in the British press about the property issues (theft by state and corruption) and lawsuits and was thinking that from a contrarian standpoint the next year or so may be a great time to buy for the cautious. You can get my email from Rick or post yours. I would really appreciate any help you could give and would love to discss with you personally. Thanks.

    • Buster January 19, 2013, 8:54 pm

      Hi Duane. This subject has been on my mind for a while now as, like yourself, the contrarian in me is whispering of an opportunity there for someone. Though not in a position to invest myself, I have suggested to others that now may well be the time to buy in Spain if personal circumstances fit; I wouldn’t necessarily recommend it as a ‘buy & sell’ type of investment, but would if it allows one to reduce living costs or put your feet up. Retirees, for example, may well find some advantages to such a move, whilst someone looking for work may not.
      Friends who have been thinking about buying for some years are planning to come down with a view to buying at auction, so I hope to be able to give some more information on this particular angle later this year. I have heard of some real bargains, as well as difficulty trying to get a look in, so seeing firsthand will hopefully give some more insights. This will probably be in the Torrevieja area, which I know fairly well, but will likely be helpful to those looking in other areas too. I don’t know the Altea area that well, other than it being outside of Torrevieja’s ‘micro-climate’ which I prefer for it’s dryness, though more vegetation may appeal to some. Also, I’m not sure how much oversupply there is there.
      Anyway, a very interesting avenue of thought right now. Though by no means an expert, I have quite a bit of knowledge/experience in this direction that may help get a clearer picture of things; the good, the bad & the ugly. Basic legal rules for visas etc. are best found online, but there are some new rules that should make things easier for US citizens.
      I’m not in Spain presently, having had the stupid idea of coming back to the UK in the middle of winter, but will most likely be back there soon enough. I can be contacted via:emissionsbusters@hotmail.co.uk, & will always try to help in whatever way I may be able to.

  • Andrew Gutterman January 9, 2013, 5:09 am

    Where did all the comments go? I clicked Refresh and all but 1 disappeared.

    Regarding head and shoulders patterns I was taught they are only effective at long term tops or bottoms, not in between. Everywhere I look I’m finding so-called technical analysts telling me about H&S or reverse H&S formations to explain every little movement in price.

    Andy

  • John Jay January 9, 2013, 2:15 am

    Meanwhile, back at the CA ranch………………

    “The California Public Employees’ Retirement System, or CalPERS, expects a 7.5 percent annualized rate of return on its more than $200 billion in investments.
    But in the fiscal year ending June 30, 2012, the system got just a 0.14-percent net return on its billions in investments, according to CalPERS’ Comprehensive Annual Financial Report for the 2011-12 fiscal year. The fund ended the fiscal year with $237 billion, down from $241 billion at the end of the previous fiscal year.”
    Link:http://tinyurl.com/a353y7m

    Man, you’ve got to try real hard to lose money when the big PIMCO bond fund has been returning 6% or so.
    Just shut down CALPERS and give the dough to Bill to manage!
    Yeah right, that’s about as likely to happen as the USPS charging first class rates for everything to end the money losing there.
    Common sense is never the answer.

    On the inflation front, guys at ZH are complaining a package of bacon now costs about twice as much as before, a 5 gallon bucket of paint now holds 4.68 gallons, and a big bag of potato chips is $5.
    I can’t say for sure, I buy none of the above myself.
    And anyway, Ben says inflation is contained at 2%.


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