Sunday, July 27, 2008

Is it time for the dollar to rally?

When everyone starts thinking the same thing then usually no one is thinking. The dollar has gotten pummeled over the last 2 1/2 years. The Fed debasing the currency has led to the dollars decline and commodity prices skyrocketing.

Now don't get me wrong I'm still a long term bear on the dollar but I think too many investors are short the dollar at this point. Everyone has been thinking the same thing for a while now. It's probably time for the second counter trend rally. Note the 3 month basing action that we've been in similar to how the first counter trend rally started. This is probably a sign that the market is running out of sellers. If there's no one left to sell then the direction of least resistance is going to be up.

The first rally lasted a year. There's no reason why it can't do so this time also. As a matter of fact I suspect it will. The FED has to have noted the explosion in commodity prices as a result of their last attempt at devaluing the dollar. I think they are going to be a bit reluctant to expand money supply for a while. Of course if money supply is not expanding we probably can't expect too much out of the stock market. The S&P was up a grand total of 3% in 05 as the dollar rallied.

Since we are in a bear market now I expect the market to gradually work lower as liquidity contracts. At some point probably by the middle of next year the FED will start to panic again as the recession doesn't improve and most likely continues to deepen. Falling commodity prices should at that time give them the cover they need to start cutting rates again and expanding the money supply.

Until that happens I don't expect too much out of the precious metal or any commodity sector for that matter. Looking at the weekly charts of GLD and the GDX it's obvious that money flows have been diverging for a while.

Another clue is our strong partner Platinum is now breaking down. Platinum has been the leader during this bull market. It's now leading the metals lower.

I don't think for a minute that the dollar bear is over or the precious metal bull for that matter. We are just going through the normal counter trend moves that happen in all bull & bear markets.

Luckily for us, all we have to do is watch the gold and silver COT for signs that the commercials are covering their huge short positions. Once we get the big money back on our side it will be time to buy the metals aggressively again and short the dollar. Until that time we'll just have to be patient.