The Dollar and Gold

Posted at 1:37 PM (CST) by & filed under Bill Holter.

By Bill Holter for Miles Franklin

Dear CIGAs,

Gold and the dollar are supposed to be mirror images of each other on the charts.  This only makes sense as gold is commonly referred to as the "anti-dollar."  Over the past 10 plus years Jim Sinclair has referred to this "mirror" relationship many, many times.  I can remember so many times in the past where on individual days this did not hold true and the "bashers" would come out of the woodwork to attack Jim.  They would say things like, "Look, if they are mirror images then how do explain this?" I had not seen a "monthly" chart on the dollar for quite a while but I had my suspicions so I again asked my buddy Trader Dan Norcini if he could send it.  Send it he did, look at this.

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Just as I suspected, the dollar is again rolling over to the downside from the not so lofty level of the 80-82 range.  In fact, from a short term standpoint we have now had 4 closes under 80 …AND closed the week under the all-important "80" level.  A break under 79 should at least lead to a test of 76.  It is important to understand that the dollar is now under all of the important moving averages which are quite bearish.  While the dollar is still in a defined triangle, the MACD’s have crossed to the downside.  Whether we break the bottom of the triangle or not, it does look to me that at least a test of the support will occur.  Below is the chart of gold which I sent 2 weeks ago, the MACD’s have not crossed yet (the HUI has for sure), this looks like a double bottom to me and resumption to the upside.

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If you compare the 2 charts of gold and the dollar, they really do look like mirror images.  As the dollar strengthens or weakens, generally gold is doing the opposite.  The opposite as in making either highs or lows in the inverse.  So while they are not mirror images on a daily chart and not exact mirrors on a percentage basis, these longer term charts really show the inverse longer term relationship that we would expect.

I wanted to show you these 2 charts together not so much to show the "inverse" nature but to show you that they are both telling a "story"…the SAME STORY!  The "MACD’s" are crossing up in gold and down in the dollar which auger well for a sustained move upward in gold while further weakness in the dollar. Some people will tell you that charts are worthless, especially because the markets (all markets) are manipulated.  They say that charts only show what has happened rather than offer you clues as to the much more important "what will happen."  I tend to agree with this view…in the short term daily charts and maybe even the weeklies.  But, when it comes to the very long term monthly charts, painting these is next to impossible just as holding back the tides are.  The long term charts are very difficult "make lie."

Chartists are a different breed.  Some read only charts while others read the charts but will only act if the chart is pointing them in the direction that they also believe the fundamentals are pointing.  An example of this would be Jim Sinclair.  He reads charts but will not take a position contrary to what he believes the fundamentals to be.  For example, I don’t believe Jim would ever "short" gold or silver in today’s environment even if the charts looked like they were topping out.  I say this because he knows that fundamentally the U.S. is broke and issuing valueless "chits" (dollars), he knows that it could be any given day that the dollar collapses for any number of reasons.  He will (already has) "load the boat" however when the charts are in agreement with the fundamentals which they are right now. 

Other chartists like Bo Polny who have had great track records don’t really care about the fundamentals.  In fact, they don’t even care "what" the chart is.  It makes no difference whether the chart is one of soybeans, stocks, interest rates, currencies, oil or what have you.  "The chart is the chart" and it makes no difference what the underlying asset is.  I personally don’t agree with this but I am not good enough or smart enough to read the short term charts…so I don’t try to.  Bo was at the Austin Q+A seminar with Jim Sinclair.  I heard Bo with my own ears "call bottom" on that Saturday afternoon.  He said, "We may have a down day Monday or Tuesday but we have bottomed and are turning up into a bull market that will last several years and be very powerful in the gold market."  So far he just about called it to the day (which he first did last June and was correct) as we have rallied over $125 since then.  He has also recently as of last week called for the dollar to break down and he sees the 79-80 level as very significant.  We will see if he is correct, the long term charts tell me that he is…again.

Many times over my career the charts of various assets would be saying that "something" was going to happen…and then all of a sudden out of the blue it would.  The news could be anything from a drought or flood, a buyout or an unknown and unexpected "loss," a lawsuit, a war, a death or a law change.  It didn’t matter "what" it was…but it was something that forced the market (particular stock or commodity) to move.  To a pure chartist it doesn’t matter "why," what matters is whether the chart was "speaking to them" and whether they were on the right side or not. 

Here is my perspective on the "charts" and the mirror images they have shown and what they mean now.  I preface this with "the markets are all rigged and charts are painted" …in the short term and with ALL "their" might …and that I am not a chartist but a fundamentalist by heart.  The long term charts as I’ve said are hard to "paint," particularly in the dollar market because of the sheer size of this market.  The dollar chart is telling me that something bad, and dollar negative is about to occur.  The "fundamentals" certainly support this whether you look strictly at the financial facts that the U.S. is bankrupt or you look at geopolitical events where the U.S.’s "power" is waning.  It makes no difference "what" it is that is out there, what does matter is that the dollar looks vulnerable and its "mirror" gold looks even more powerful.  It is also important that you understand that this is "happening" now, right now, the MACD’s are telling you this!  Do I know "THE" day that this will be recognized?  No, of course not but at this point it looks like the "bottom" for gold has already occurred and the "top" in the dollar as well is in the rear view mirror.

If I had to guess, I would say that some sort of geopolitical event will take place that "isolates" or shines the spotlight on the U.S. and our finances.  This could be anything from the Saudi’s accepting another currency other than the dollar for their oil, the Chinese announcing a 5,000+ metric ton hoard of gold or Russia invading the Ukraine unopposed.  It could be something as simple as us issuing sanctions that either backfire or are not adhered to by our allies.  It could be something as simple as the G-20 telling us that we are not invited to their next meeting.  It could be… literally anything. 

Not knowing "what" might be the "trigger" however it is not a problem.  As long as you understand what it means.  "Means" as in gold will move higher and the "standard of living" (the dollar) will move lower.  ALWAYS in the past, whenever something "bad" happened the dollar would always strengthen and rally.  It did this because the U.S. was seen as a safe haven with a strict rule of law and a military to back it all up.  The next time that you see that "something bad" has happened…watch what the dollar does and also watch what gold does.  The monthly charts are screaming up in gold and whispering down in the dollar, if these moves begin to accelerate on some sort of bad news then you will know that the game has changed!  The "fundamental meaning" is that the Sun is setting on the West.   Regards,
Bill Holter on behalf of Miles Franklin