Wednesday, March 5, 2008

The dollar has been in a bear market since 2002

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The gold and energy markets are in rally mode mostly due to our weakening economy, the prospect for the Fed to continue to lower rates and the impact that is having on the doller. (Most of this article was put together yesterday and this morning, gold and oil are down as this Update goes out).

Dollar

The dollar has been in a bear market since 2002. Here is a long-term chart:

[Image 1]

There is a concept in technical analysis called fanning where a trend goes through three accelerations in a long-term trend, fanning.

The first dark trend line is the first fan and they normally have the fastest acceleration. The second fan, the broken line, has a slower acceleration. The third fan is normally the last fan and is a sign the trend may reverse or may be over. Prices would normally have to base for there to be a reversal.

If we get a rally, short covering in the dollar, a third fan could start. From a technical stand point, the bear market in the dollar may be about 2/3s over.

We stated in past Updates that it was likely that the dollar would fall through the 75 level and head towards 70. It looks like the dollar is following this scenario. It would probably find support at this area.

If the dollar falls to 70, that would be about a 6.7% drop from its support of 75. Gold would have to move to $1,000 to break even if the dollar was hedged with gold. Oil would have to go to about $107 for a breakeven to hedge the dollar.

Of course, there are other variables driving gold and oil besides the bear market in the dollar.

Gold

Gold is up about 4 times since its low.

Again, the drop in the dollar is the main fuel for the current gold rally. Here is a long-term chart for gold:

[Image 2]

The fanning principle doesn't quite fit gold, yet, as normally the fans get weaker during a bull market. In the chart above the last rally has accelerated. This means there is not a red flag for gold long-term (according to the fanning principle), but the current acceleration line in gold is a red flag short-term. We would expect some profit taking and consolidation at the $1,000 level, technically speaking.

Again, there are other variables driving the price of gold, supply demand issues, geopolitical threats, and potential global financial disruptions.

Oil

Oil is up about 5 times since 2000 and 10 times since the low in 1998.

Besides the lower dollar, oil has rallied due to increased tensions between major oil producer Venezuela and its neighbor Columbia.

Below is a long-term chart for oil:

[Image 2]

Oil has a similar pattern as gold, but it seems as though prices are starting to consolidate around the $100 area.

Oil does have some bearish fundamentals that will probably weigh on prices. Our good friend Tom McClellan from the McClellan Market Report sent us a chart showing that demand is falling due to higher prices and a slowing economy that we posted in a recent Update.

Yesterday the Wall Street Journal posted an article " Americans Start to Curb Their Thirst for Gasoline" Click here to read the article if you're a subscriber.

Here is a chart from the article:

[Image 4]

The graph does show the correlation between high gas prices and demand

Longer-term the forces of supply and demand should take gold and energy prices higher.

Lower energy demand and the counter forces of a weak dollar will continue to make the energy markets volatile.

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