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The US Dollar October Mystery and Its Influence on Precious Metals

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Take a look at gold, the US dollar, and the precious metals market.

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Right now, all currencies on the planet are backed by debt. If you need a refresher course in why fiat money can become toast, here are some words published this week on the website of Texas Congressman Ron Paul about fiat money and gold standard:
Fiat money is not good money because it can be issued without limit and therefore cannot act as a stable store of value. A fiat monetary system gives complete discretion to those who run the printing press, allowing governments to spend money without having to suffer the political consequences of raising taxes. Fiat money benefits those who create it and receive it first, enriching government and its cronies. And the negative effects of fiat money are disguised so that people do not realize that money the Fed creates today is the reason for the busts, rising prices and unemployment, and diminished standard of living tomorrow.

This is why it is so important to allow people the freedom to choose stable money. Earlier this Congress I introduced the Free Competition in Currency Act (HR 1098) to permit people to use gold as money again. By eliminating taxes on gold and other precious metals and repealing legal tender laws, people are given the option between using good money or fiat money. If the government persists in debasing the dollar -- as money monopolists have always done - then the people would be able to protect themselves by using alternatives such as gold that are both sound and stable.

As the fiat money pyramid crumbles, gold retains its luster. Rather than being the barbarous relic Keynesians have tried to lead us to believe it is, gold is, as the Bundesbank president put it, "a timeless classic." The defamation of gold wrought by central banks and governments is because gold exposes the devaluation of fiat currencies and the flawed policies of government. Governments hate gold because the people cannot be fooled by it.

We all know that gold has gone up spectacularly in the last decade. If you want to look at the numbers just for the sheer pleasure of it, here is a list. (The ones who will get the most enjoyment from this list are those that got into the gold trade in its earlier stages.)

2000 - $273.60
2001 - $279.00
2002 - $348.20
2003 - $416.10
2004 - $438.40
2005 - $518.90
2006 - $638.00
2007 - $838.00
2008 - $889.00
2009 - $1096.50
2010 - $1421.40
2011 - $1566.80
2012 - $???

While nobody can tell now high will gold go in 2012, the odds are that it will end up much higher than it did last year.

Now we will see if the short-term picture is as positive as the long-term one. As indicated in the title of this article, we will focus on the situation in the currency markets in order to estimate the most likely outcome from here. We will start with the USD Index long-term chart (charts courtesy of http://stockcharts.com).



There were no long-term changes this week and the picture remains bearish because of the invalidation of the previous breakout. This is an important bearish phenomenon for the medium term, and the implications for the months ahead are quite bearish.

The USD long-term bearish outlook remains in place.



However, the above medium-term chart that can tell us some interesting things about the US currency's near future. This chart allows us to use two important local tops (from 2010 and 2012) to create a support line. Adding this support line to our chart adds value because clearly this support line has stopped the decline seen recently in the USD Index and therefore improves the bullish outlook.

In fact, taking into account this perspective alone, the outlook is bullish. While a major rally does not appear likely based on the long-term picture, a smaller upswing appears quite possible from a medium-term outlook. Combining the implications and signals of the two, it seems that another attempt to move above the declining resistance line (seen on the previous, long-term chart) is a good possibility in the near term.

Summing up, we could still see another small decline in the USD Index followed by a bigger rally and then a continuation of the decline. There appears to be a good possibility for a correction in the precious metals sector when the USD moves higher again.

Thank you for reading. Have a great and profitable week!

For the full version of this essay and more, visit Sunshine Profits' website.

Twitter: @SunshineProfits
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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