Without question, gold has been a relative outperformer this year versus equities and virtually all commodities. The only thing gold has not outperformed is the U.S. dollar and Treasuries. Year-to-date, spot gold is down about 14% while the U.S. dollar has risen 14%. However, it appears that once again it is time for gold bulls and dollar bears to garner some spotlight and attention.

The relationship of gold to the dollar is important in either the bullish or bearish case. Below is a long-term quarterly chart of the U.S. Dollar Index Spot showing a TD-Sequential Buy Setup. (For a brief primer on DeMark TD-Sequential, check this article out.) Shorter time frames suggest the dollar should move lower, but lower within the context of the longer-term dollar bull market that should begin later in 2009.

Below is the quarterly chart of the Dollar Index Spot.


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In order to qualify a breakout of that level, which would indicate a trend change, we need lower prices. Yes, counterintuitive as that is, we need the next quarter's bar to close below this bar. Then, if we get a move through that TDST level that would signify an important longer-term context change.

Why lower prices? In order to "qualify" an upside breakout, the bar on the chart prior to the breakout must close lower than the bar that proceeds it. Why? think about it in psychological terms. Breakouts fail when too many people anticipate the breakout, trying to buy and position themselves ahead of it. That depletes the pool of available buyers to perpetuate the price movement once the breakout level is triggered. By closing lower on the bar that proceeds the breakout, the market psychology is suggesting that it is unexpected. In the case of breakouts or breakdowns, surprise is our ally.

Gold Poised for New Run?

Gold is positioned similarly to the U.S. Dollar Index Spot... only from the opposite end of the spectrum. Below is the quarterly chart of Gold Spot.

Gold Quarterly

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Note the TD-Sequential sell signal from Q2 2008, and confirming price flip.

The bottom line is that there is some accumulating evidence on short-term time frames that we may be nearing a point where gold could rally into first half of 2009. After that, however, similar to the dollar and equities, I expect the second half of 2009 to yield (literally) to the longer-term deflationary trend that recently accelerated.

What does that mean? Simply out, it means a temporary reprieve for the lower equities, lower commodities, higher dollar and higher bond prices we have seen for most of this year.

Understandably, there are those who maintain we are approaching an aggressively inflationary or perhaps even a hyperinflationary meltdown. The conventional wisdom is that the dollar will collapse and gold will skyrocket. This is entirely understandable.

Why? Because it is very difficult to psychologically accept the reversal of a long-standing trend. As humans we tend to overweight recent events and believe that what has most recently happened will continue to happen. What has happened most recently is that the dollar has already collapsed (by 40% since 2001) and that gold has already skyrocketed (up 240% over the same period).

But that was the last war. This is a new one.

As the saying goes, "Many shall be restored that are now fallen, and many shall fail that are now in honor."