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The Beginning of a Currency Crisis?


The dollar is at the center of the storm, and gold is rallying in all currencies.

The "race to debase" went into high gear yesterday. First, Brazil imposed a tax on foreign investment to try and stem the real's climb. Second, the Bank of Canada warned that the strong Loonie could offset the favorable economic developments since July. Third, the EU whined about the strong euro and complained that the US was "flooding the world" with dollars and creating dollar weakness that was "unbearable."

So, basically we're seeing the dollar's weakness begin to turn from a global positive to more of a concern -- or to put it differently, the "dollar crisis" may slowly be getting recognized for what it is.

Unfortunately, much like the 2008 collapse of the US financial system, there's not a whole lot that anyone can do about that dollar weakness. And as other central banks are eventually forced to try to intervene and print their own currency or raise capital barriers (like Brazil), it's going to favor gold more and more in all currencies regardless of what the dollar is doing.

With that said, the action in the gold stocks versus both gold and silver was a little odd yesterday. The dollar was firmer, which had both gold and gold stocks under pressure, but the gold stocks were far heavier, with the GDX actually making a new low for the move since the recent peak on October 14.

We've seen this action before though. In fact, we've seen it a couple times over the past two months where the gold stocks appeared to be far heavier than the metal on days that the dollar bounced. In each instance, a substantial rally then kicked off within a day or two (see the following chart of the dollar index, the GDX, and gold).

Click to enlarge

The most recent instance of this action in early October also interestingly produced a divergence exactly like yesterday's in which the GDX took out its lows for the recent correction while gold didn't (see the chart).
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Position in gold, gold stocks.

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