Dollar, Gold and World Equity Markets - Corrections Abound!

July 29, 2009 · Posted in Weekly Posts · Comment

Over the past few weeks we had been predicting a global equity market correction, including China. That appeared to start but then turned on a dime into a substantial rally in which we did not participate. China however did not participate in that decline either - it simply continued to rally. We have also been urging caution on the dollar decline. Specifically, we noted that while our long term forecast for a substantially lower US dollar still holds the intermediate term was cloudy due to the technical behavior of the market and that we may see a dollar rally near term.

Last evening China corrected by 5% and today the US dollar shot upward putting a bullet in gold and commodities at least temporarily. US markets have been weak but not significantly so. What we are looking for is a correction that will last a few days to a week or two and take the major commodities and commodity producers down to test their 50 day moving averages. Some are close now. We will also be looking for gold to hold within the symmetrical triangle we have shown in previous posts. If markets behave in an orderly fashion, correct, consolidate, and prepare to move higher, then we will re-enter on the long side with strategic positions. If not, then we will continue to day trade the market with short term plays.

Below we will look at the US dollar index, gold, Shanghai, Australia, Brazil, and the S&P.

US Dollar Index 07/29/2009

As we can see above the US dollar has bounced off of its previous lows. This needs to be watched closely as the potential for a double bottom here is real with all that entails for precious metals and commodities. Also note that the 50 day moving average is not that far away (blue line). It will be important to note how the dollar behaves around that line.

Gold 07/29/2009

Gold can be seen to have dropped significantly and to have approached the lower trend line of the symmetrical triangle. We note that there are a few ways to draw the triangle. This often happens and indeed it frequently occurs that one pattern will morph into another. Ether way, gold is headed down and has little room to firm here before the bullish case starts becoming questionable. We have held off entering new gold longs and it was because we feared a dollar reversal.

Shanghai 07/29/2009

Now that’s a correction. Typically China will correct when the RSI oscillator hits 70 or a little more. As can bee seen above, Shanghai has been in this imminent correction state for over a month and still has powered higher. We can expect further downside here. Note that this is coupled with news reports calling into question how the massive bank lending in China has actually been deployed. It was supposed to be used to stimulate the economy and certainly economic stimulation has occurred but there is concern that much of it has been deployed in speculative ventures in equities and property creating further bubbles. As China has been seen as the one bright light in the global economy we need to watch China closely as a sever correction could have implications for the rest of the world.

Australia 07/29/2009

Bovespa 07/29/2009

Brazil and Australia have started a correction but, like the US, it is so far well contained. We will look for evidence that these two ave completed their correction/consolidation as confirmation of the commodity producers having completed their corrections.

S&P 07/29/2009

Our correction by contrast, certainly to China, is so far pretty small but it is very much needed. We have rallied into the close each of the last two days. We may well have an up day shortly prior to any further movement downward.

For those who are following the looming dollar crisis we urge you to read our free post Watch Out For Sterling where we raise the case that a precipitous fall in Sterling could serve to elevate the dollar near term and trash trading positions betting on an imminent dollar collapse.

Readers should take a look at our post The Most Important Question Facing Investors to understand the risks we are currently facing.

We wrote recently in “The Character of the Dollar Collapse” on the risks to investors in any asset of a dollar collapse.

Murdock Global Insight began discussing the dollar’s impending demise in January when the dollar was still generally strengthening How the US Dollar Will Lose Reserve Status. Now, in June, the idea that the dollar is destined for significantly lower levels at some point has entered the mainstream. The US fiscal position is increasingly being seen as untenable. Interest rates are surging for a variety of reasons but he massive debt issuance by the US is one primary cause. We have established the Murdock Strategic Portfolio for the purpose of growing our wealth in the face of a dollar collapse/surging China scenario The Strategic Portfolioand we have written about the risks that a free fall in the dollar could cause to those investments The Most Important Question Facing Investors.

To find out the details look at our strategic portfolio scorecard. The Strategic Portfolio is how we are investing in the global trend of dollar depreciation and Asian recovery and trading around that trend to ensure we stay profitable. Take advantage of the Free Two Week Trial and read it. We have also update the scorecard for today’s action.

The Strategic Portfolio

Portfolio Scorecard 07/20/2009

In addition, we strongly recommend reading The Most Important Question Facing Investors as recent action illustrates directly what we are faced with if the dollar decline turns into a free-fall.

To view previous Members Only posts simply follow the instructions under the “Become a Member” tab and select the “One Month Free Membership” when you get to the Products page. You must complete the checkout process in order for the Membership to complete. Registration is not sufficient. You are under no obligation to continue beyond the One Month Free Trial and your e-mail and address will not be shared with third parties.

The following additional posts are highly relevant:

The Strategic Portfolio

The Most Important Question Facing Investors

On the Edge of the Empire, Dollar Influence is Declining

The Dollar and Gold Near Term

How the US Dollar Will Lose Reserve Status

Chinese Gold British Debt

China: Part 2 - Bonds, Dollars, and Inflation”.

“The Fed and The Bond Market - Will Intervention be Effective?”

“The Coming Bond Debacle”

Fundamental Trends