The Dollar Weakens, While Gold Strengthens

The US Dollar Index dropped 0.6% today. It was one of the largest one-day declines in over a month. Does it foretell further dollar weakness? The following chart will help answer this question.

The Dollar Index closed today at a 3-week low. What's more, the Dollar Index has again failed to break out of its long-term downtrend channel. We can see on the above chart how the index bumped up against the red line marking the top of its downtrend channel, and then retreated. That's a clear sign of weakness. It looks to me like the rush to exit out of the dollar is overwhelming the US Treasury's attempts to keep the dollar on an even keel before the November 7th election.

It's too early to say whether the dollar is resuming its long-term downtrend. That won't happen until the Dollar Index breaks below its August 4th low of 84.57. But the fundamental factors debasing the dollar have not improved. Too many dollars are being created as a result of the growing mountain of debt in the States. And central banks and investors around the world are diversifying out of the dollar in favor of assets representing better value -- assets like gold and silver, which have a time-tested record of providing a safe haven from inflation and other types of monetary turmoil.

Gold is painting an interesting picture at the moment, as we can see from the above chart. I noted in my last alert that gold had broken its medium-term uptrend line. We can see that break on the above chart.

Gold, however, held support at its mid-June low. It has now climbed back along its uptrend line to again challenge the $600 level. This achievement demonstrates considerable strength given all of the powerful governmental and banking forces lined up against gold that are aiming to keep it below $600 prior to the important mid-term US election. The last thing politicians want before an election is a rising gold price signaling that more inflation is coming.

The election is now less than two weeks away. And the gold market looks like a thoroughbred waiting for the gate to open. The 'gate' of course is the pennant formation on the above chart. When gold breaks out of that pennant, it will start its inevitable climb toward its all-time record high of $850 per ounce ($27.33 per goldgram).

If gold is a thoroughbred waiting for the gate, then silver is a top-fuel dragster waiting for the green light. The following chart shows that silver has been much more powerful than gold.

Note how silver followed gold lower earlier this month, when silver also broke below both its uptrend line and 200-day moving average. However, while gold fell back to its mid-June low, silver in contrast quickly reversed course. Consequently, silver never got close to its mid-June low.

In my last alert I noted this divergence between silver and gold since mid-June. I called it a "non-confirmation", and stated: "They usually signal that a correction is over, or nearly so." That display of strength by silver was impressive. What's more, silver continues to impress.

Silver remains above its 200-day moving average. While it is still in the correction that began in mid-May, it did not break down from its original pennant formation. Silver now stands ready to break out of this pennant to the upside and resume its long-term uptrend.

I ended my last alert by saying: "I think we have to look across the valley, which I define as the four weeks left until the election. Thereafter, reality strikes, if it hasn't already struck by then. Gold and silver are still the place to be." We now have less than two weeks left until the election, and it looks like silver isn't going to wait until then before heading higher. An upside break-out by silver, and then gold, looks imminent.

Published by GoldMoney
Copyright © 2006. All rights reserved.
Edited by James Turk, alert@goldmoney.com

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