Monday, November 27, 2006

Dollar takes a tumble

I had to work on Black Friday which definitely put me in the minority. In my area, there were stores that opened at 3-5 AM. Unbeknown to most Americans, their dollar took a tumble just as they stood inline for such bargains as sub $1,000 42” LCD TVs. Did the money saved compensate for the lost purchasing power of their savings? I doubt many were making that calculation. Oh, wait, what savings?

Over a 3 year chart, the neck line of the large head and shoulder (double H&S?) pattern that went back to the “Buffet short” on the dollar in 2005 was broken to the downside. This pattern projects a downside target of 75 on the dollar index. Was this a case of the Chinese making good on their promise to diversify away from dollars? I personally avoid such speculations. If I wonder about where the dollar is heading all I have to do is to look at the deficit and future obligations of the US government. The exact trajectory is secondary.

Not surprisingly, PMs did well. Gold spot gained over $8 to end at $637.9 and silver spot $0.39 to end at $13.40. HUI also managed a gain of almost 2.5% to end at over 340 on a shortened trading day. Here’s a summary of my recent posts:

  • Oct. 25 HUI at 316, noted some buying strength in PMs.
  • Nov. 9 Advocated taking partial positions through GDX, even though it was overbought. HUI closed at 341.
  • Nov. 16 Reduced 25% of my position after the HUI:gold ratio broke short term support, although the HUI was still above my “line in the sand” of 315.

That last move turned out overly cautious, as the HUI never closed below 317. The worst it did was an intraday low of 312 before reversing up on the same day. The 315-316 area corresponded to a 38.2% retracement of the previous rally, and of course to the level on Oct. 25. I did manage to replenish some lost positions through UNWPX the day before Thanksgiving. After Friday’s gain, we’re back to the same level as Nov. 9 but with the overbought condition worked off. Should this strength continue on Monday, it would be the “all clear” signal that the gold bulls have been waiting for all summer. EW/Fibonacci fans will be happy to note that it’s roughly 6.5 months from the May high which is half of the length of the preceding 13-month bull leg.

As said many times before, the PM sector is volatile. It sure didn’t feel good to “flip-flop” between Nov. 9th and 16th, but if one’s goal is to make money then one can’t be concerned with being wrong, just as if there’s a big drop on Monday I know I’ll have to reevaluate. The key is not to predict the future, but to know what to do for each outcome that materializes.