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Dollar’s Next Rally Looks Doomed

By Rick Ackerman Posted on September 17, 2009, 4:22 am EDT Last Updated September 17, 2009, 4:54 am EDT

Here are two numbers to jot down if you’re interested in gold and the U.S. dollar:  75.47 and 72.93.  Those are our current downside targets for the NYBOT Dollar Index, and we are quite confident that both will be reached in the fullness of time. The first lies just 1% below yesterday’s settlement price of 76.28; the second, 4.3% below it.  Like you, we’ve heard many compelling arguments from dollar bulls and bears. Some think it is about to turn very strong, while others see a collapse. Our gut feeling is that the bulls will be right, and that the dollar will rise because of a deflationary short-squeeze on all who owe dollars.  But when push comes to shove, we are perfectly willing to toss everyone’s best arguments out the window – including even our own – and to simply go with the charts.  And the charts say, simply, that the dollar will continue lower after a corrective rally from just beneath current levels.

Dollar-about-to-rally-small2

If so, the bearish targets given above would square nicely with our outlook for gold. We’ve been quite bullish on the stuff for a long, long time and have no disagreement with those who believe think bullion’s bull market is still in the warm-up stage. However, our immediate outlook calls for a potentially important top at $1074, basis the December Comex contract. That would imply a rally of about 5% from yesterday’s settlement price of $1020. If this scenario comes to pass, the high in gold would likely coincide with a temporary low in the Dollar Index at the 75.47 target given above. 

 A Buying Opportunity in Gold

And then? We won’t hazard a guess concerning how high the dollar will rally, but we would view it as corrective rather than impulsive. That means gold’s corresponding decline would be corrective as well, making it a buying opportunity for long-term bulls. Once gold’s correction has run its course, we would expect it to rally anew as the Dollar Index resumes its decline, presumably to the 72.93 target. Gold would probably be trading well above $1074 by that time – perhaps around $1300-$400 – but we’ll leave it to the swamis to tell you how exactly high.

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  • Occdude September 18, 2009, 7:28 am

    I meant the transition between night and day or inflation and deflation would be twilight like condition resembling stagflation. Of course bond yields don’t reflect that scenario yet, but rattle their cages and you’ ll see the vigilantes punish government debt with higher yields. This of course, will stop any gross attempts at reflation in its tracts and deflationary forces can bring on the forces of liquidation.

    As far as the CPI goes, I’m sure you’ve seen the latest PPI surprise and CPI can’t befar behind. I’ll give you the fact it may be a statistical blip, but this “twilight market” may resemble both forces interwoven for a while, and therein lies the bewilderment experienced by the orthodoxy during THIS period, EJ is going to look like a genius.

  • Goldilocks September 17, 2009, 11:13 pm

    It seems your target for gold is a little high with a DX of 72.93. I would expect gold to be around $1100-1150. I hope you’re right tho.

  • ricecake September 17, 2009, 5:32 pm

    Market putting the cart in front of the horse. How far can it goes like that?

  • Rich September 17, 2009, 3:30 pm

    Pre-market futures down below Fair Market Value in another down opening pattern, so often negated later in the day this may have mesmerized many traders. That Goldman Sachs is distributing high risk shadow bank conglomerate Textron to asset management clients after getting TXT investment banking fees, and unemployed retail investors are day trading with fewer credit cards left cannot be a good sign for the longevity of this Bear Market Rally. We’re inclined to agree with UBS Art Cashin the market may be ahead of itself. In fact, way ahead, discounting earnings doubling in 2010 and Blue Sky balance sheet eternity. Whether turnaround Thursday is the day of reckoning, we shall see. We cannot help but agree with you Rick the dollar may rise as this Goldilocked market falls. We shall see how far and how long that lasts. If bankrupt banks and corporations run out of Fed credit from a balance sheet swollen with agency assets, Mr Market may cascade down more than the -85% in 1930, when most were similarly ebullient from a 50% rally. Ok, history never repeats exactly, but we are on notice. BB publicly promoted economic recovery since at least Feb 2008, while reportedly telling Senator Shelby privately it ain’t happening. The numbers just aren’t there beyond this liquidity-driven bear market rally which capitulated the bears and forecast 10 of the last five economic recoveries to paraphrase Samuelson. Only actual savings and net worth may save the day, and that day may indeed be a long way off…

  • Occdude September 17, 2009, 6:28 am

    The current economic environment looks like we are in a early stage of stagflation. PPI number up, unemployment up, gold up all we need are rising rates (kept down by big Ben) to complete the picture.

    This is some kind of wierd transitory phase we’re in at least temporarily. Theres still credit contraction, but unless you see rates rise the bond boys see deflation. The question is are they right, and are they right, right now?

    &&&&&

    With prodigiously powerful forces of inflation and deflation now in play, deflation is overwhelmingly winning. That makes stagflation, the middle-of-the-road senario, about as likely as a Martian invasion. Stagflation is Eric Janszen’s (iTulip’s) scenario, and that is why I stopped even arguing with him. Concerning the “bond boys,” is there anything observable in this world that would suggest they are wrong? Unless grocery items are your entire CPI, it’s plain to see that prices for nearly everything else are falling. RA


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