The Dollar and Gold: A Contrarian Take   (August 12, 2009)

The dollar is doomed and gold is heading to $2,000 an ounce. Agreed, but not just yet.

Please stop me before I go contrarian again! Oh, too late: three cheers for the U.S. dollar. Analysts bullish on the dollar shrank to the vanishing point recently--by one count, only 3% of those foolish enough to offer an opinion were bullish on the buck.

That extreme of sentiment is a very reliable indicator that the trend is about to reverse.

Respected Elliott Wave analyst Robert Prechter came out today with a call for a stronger dollar, and since Mr. Prechter apparently made a February call for his clients to sell their shorts and go long, anticipating a market rise in early March, his opinion carries a certain heft.

But let's not rely on anyone else's analysis, though we will certainly study it. Here are two simple weekly charts of the U.S. dollar and its dancing partner, gold (the tracking ETF, GLD). As always, please read the HUGE GIANT BIG FAT DISCLAIMER below; this is not investment advice, it is merely the free wanderings of an amateur observer.

For something that is supposedly doomed, the dollar is looking extremely bullish to my amateur eye. Gee, there's a huge bullish cross in this chart--the 50-day moving average (MA) has crossed above the 200-day MA, indicating a long-term reversal of downtrend to uptrend. Funny nobody mentions that--perhaps because it doesn't fit their pre-formed opinion that the dollar should collapse?

Hey, I agree, it will collapse eventually, but this chart suggests it has a good rally in it over the next few months or perhaps even the next few years.

Notice the histogram is divergent with price: it's been rising even as the price continued falling. That often indicates a trend reversal is close at hand. MACD and the full stochastic are crossing into very bullish signals, too.

Last but not least, the price is puling away from the lower Bollinger Band. That's a bullish indicator, too.

OK, here's Uncle Buck's dancing partner, gold. Gold usually rises when the dollar tanks, and vice-versa--they usually play see-saw for the obvious reason gold is a refuge of value when any currency loses ground against other currencies and tangible goods.

Yes, I believe gold will rise to $1,300, $2,000 and even $3,000 an ounce--but not yet. This chart is filled with reasons to doubt an advance from here. There is a major flag/pennant forming, which usually means price will soon break up or down in a big way.

Will gold break out of this flag to the upside? The evidence for such a move is skimpy, at best; volume has been declining, and both MACD and stochastics are in weak downtrends as well. Anything can happen, but just as a purely technical exercise, if you look at these charts with no preconceptions, the USD chart is looking very bullish while the GLD charts is looking tired, as if it's ready to drop.

There's another see-saw in play. The dollar's been playing see-saw with the stock market this year--when the dollar topped out, stocks hit bottom, and now stocks have peaked just as the dollar has bottomed and turned up. If the dollar does strengthen considerably, then we can expect not just gold to decline but stocks, too.

What are the fundamental reasons behind such a move up in the dollar? I have no idea. I just look at the charts--as an amateur observer, of course.

NOTE: I am pleased to announce that editor Michael Rainey at AOL's "Daily Finance" site has asked me to be a contributing blogger. My first story was posted Sunday, 8/9/09: Ten reasons to beware the Bear. I believe he was seeking a skeptic and I will try to deliver the goods.

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