Dear CIGAs,

Click the following chart to enlarge today’s Monthly Gold chart in PDF format with commentary from Trader Dan Norcini

Why the U.S. Dollar Is Vulnerable to Decline Now
March 04, 2009

The Technical Outlook
If we observe the $USD graph for March 2, 2009, we see that the USD has just broken above the resistance level of 88. Will this mark the beginning of a new run higher in the U.S. dollar? Currently the U.S. dollar is benefiting from the propaganda of other countries (i.e. China), political games, intervention ofthe Exchange Stabilization Fund, and the foolish actions of the Bank of England [BOE] and the European Central Bank [ECB] which have caused Europeans to flee the Euro and the Pound Sterling.

However, fleeing the Euro and the Pound Sterling for the U.S. dollar is akin to fleeing the Lusitania for the Titanic. All three currencies are sinking ships and fleeing one sinking ship for another sinking ship is just not intelligent and is destined to end poorly for all involved parties.

Therefore, I believe that this subsequent “breakout” above 88 will be short-lived. While the U.S. dollar may meander higher for a short-time longer above 88 as the U.S. Treasury and the Exchange Stabilization Fund reach deeper into their bag of monetary tricks, I do believe that when it breaks back down below 88 sometime shortly, the retreat will be marked by periods of extreme volatility and rapid decline.

On a subsequent decline below 88, which in my mind is imminent, I have noted an important level of intermediate resistance at around 81-82 in the above chart, as this was the floor that existed for three years before the USD plummeted below it in 2007.

If it breaches this level, the next point of resistance would be at 76. If the USD breaches 76, then the bottom would be anyone’s guess at this point. This breach may take some time to develop, but right now, I would have to say that the dollar’s breakout above 88 is likely to be a false breakout.

However, my belief in a sharp, and at times, violent decline in the dollar’s not-so distant future is not based upon the above technical analysis so much as the political clues that are beginning to slowly rise to the surface in not so aboveboard comments made by other nation-states. So even against the unsound and increasingly risky Euro and Pound Sterling currencies, betting on the U.S. dollar is still a very risky play at this juncture.

The More Important Political Outlook

On February 11, 2009, the Financial Times out of London reported:

“China will continue to buy US Treasury bonds even though it knows the dollar will depreciate because such investments remain its “only option” in a perilous world, a senior Chinese banking regulator said on Wednesday. China has used the dollars it accumulates selling manufactured goods to US consumers to accumulate the world’s largest holding of Treasuries.”

“Mr. Luo, speaking at the Global Association of Risk Management’s 10th Annual Risk Management Convention, said: ‘Except for US Treasuries, what can you hold?’ he asked. ‘Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.’ Mr Luo, whose English tends toward the colloquial, added: ‘We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .We know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.’”

This is my analysis of the above statement. If you have ever played poker before, you know that Mr. Luo is bluffing to conceal the true intentions of the Chinese government. If you are planning to dump a significant portion of assets (U.S. Treasuries) that you believe will be heading towards massive depreciation, the last thing an intelligent market player would do is to tip his hand before executing his plan. Instead, an intelligent player would tell the world what he wants the world to believe, i.e., that he has no choice but to continue to hold U.S. Treasuries while he makes alternate plans to offload them. The monetary crisis that is the root of all global economic problems today is a game with massive stakes at hand, and no player in this global game, even a key one such as China, is going to reveal her true intentions.

That said, I imagine that Mr. Luo is not a very accomplished poker player, because it appears that he played his bluff very poorly. If I were him, I would have not said another word after telling the world that “U.S. Treasuries are the safe haven.” Instead, Mr. Luo ruined his bluff by trying hard to convince us that China has no options with his statement: “We hate you guys…we hate you guys but there is nothing much we can do.”

More… http://seekingalpha.com/article/123965-why-the-u-s-dollar-is-vulnerable-to-decline-now