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US Dollar Likely to Spur Precious Metals Higher


Right now, there seem to be three possible scenarios for the eurozone, and all will be bullish for gold.


Analysts for Goldman Sachs have recently predicted that low interest rates will keep gold prices climbing for the rest of this year and into 2012 and raised their price forecasts for the precious metal to $1,930 per ounce from $1,860. So far this year, the price of gold is up about 26%.

Among other things, gold has been a beneficiary of the imploding euro. It's simple physics, or economics, in this case. Money has to go somewhere. Bonds of the smaller countries have been hit, stock markets have made little progress all year, and European banks have suffered losses over Greek debt, so there isn't much choice left for investors.

Some European money has crossed the Alps into Switzerland, always the continental safe haven of choice in turbulent times. But the Swiss took steps this summer to cap their currency to keep it from rising too quickly and destroying the attractiveness of their exports. German bonds have also been a beneficiary, and the yield on the 10-year German bond has fallen to 1.7%, compared to 2008 when it was 4.5%. Germany is the stable, productive, responsible adult on the continent. But even Germany's debt-to-GDP ratios don't dazzle.

Right now, there seem to be three possible scenarios for the eurozone, and all will be bullish for gold.

If the European Central Bank starts buying eurozone bonds on a massive scale, printing money to the tune of trillions of euros to do so, the massive amounts of money flooding the market will inevitably push the price of gold up.

If, on the other hand, the eurozone falls apart, one does not need much imagination to foresee the chaos that will ensue. Using the word "chaos" will be an understatement. Each country will have to introduce new currencies along with stringent capital controls to stop money from fleeing the country. Banks will collapse. We're talking mayhem.

This is the kind of pandemonium that would be a boon for gold. For a while, gold could become the only credible currency left standing.

A third possibility is that the current mess with a flavor-of-the-week eurozone crisis will drag on for a few more years. Last week Prime Minister Mario Monti was selected to form a new Italian government. Monti, who is known in the Italian press as "Super Mario," will have to face heroic challenges as he tries to steer his country from the brink of economic disaster.

Whatever the most recent crisis, and they seem to appear at an alarming rate of about one a week, gold should also flourish in that environment as investors lose patience and confidence in fiat currencies.

What's the most likely outcome? First the third possibility, then a mix of the third and first one, which will ultimately lead to the second scenario; however, it seems that it would take years for this stage to be reached.

Now, let's move on from the long term to the short term and to the outlook for the precious metals market. Those of us who are interested in where the market is headed in the next weeks will appreciate the technical analysis part. I will start with the analysis of the USD Index (charts courtesy of and then discuss its meaning to the precious metals investors.

In the very long-term USD Index chart, the short-term trend continues to be up and the long-term, down. An important resistance line is just below the 80-level very close to the levels that the dollar has just reached. Even if the rally continues from here, it is not likely to take USD much higher.

In the short-term USD Index chart, we see that the uptrend in the USD Index has continued this week. Based on the very long-term chart, we see that the resistance line is very close to the current index. The resistance is close to 80 and is likely to be where the index tops. This could be seen very soon. A cyclical turning point is at hand as well, which makes this an important point in time. The current rally could reverse very soon, and declines may be seen for some time here.

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