Caution Light Flashing for Gold Longs, Dollar Shorts

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machinehead's picture
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Caution Light Flashing for Gold Longs, Dollar Shorts

Here's a chart by Chris Kimble (courtesy of the excellent dshort.com site) showing that bullish sentiment on the dollar is down to only 3%:

http://dshort.com/articles/Kimble/101014-Dollar-patterns.html

When the crowd is this negative on the dollar, it has a tendency to pop, or at least stop falling. 

How could this be, when the Fed is rumored to be kicking off QE2 in a couple of weeks? Well, maybe QE2 is already discounted in the dollar's value. After all, it has to be one of the most highly telegraphed easing moves in history. 

A second confirmation, from slightly different sentiment data, can be found on the final page (7/7) in the scribd document embedded in this zerohedge post by IceCap Asset Management. It reproduces a Ned Davis chart of a sentiment-based mechanical trading system for the US dollar. This system, based on negative sentiment, has also flashed a buy signal on the dollar.

http://www.zerohedge.com/article/wrath-bernanke-icecap-management-star-trek-2-harbinger-things-come

The likely implication of a flat or firming dollar would be a pause or pullback in the gold, silver and commodity rallies. I think they have a lot farther to go, but short term they are a bit overbought, and could be due for a pause if the dollar finds support here. In the past week, I've lightened up on my gold stock holdings.

Red-hot emerging markets, also correlated with dollar weakness, could meet some headwinds as well. This is particularly true as China, India and Brazil all are engaged in monetary tightening and policies intended to discourage hot-money capital inflows. If these policies are successful, it will take a bit of steam out of their recent stock and bond rallies. 

Long term the dollar is doomed. But it could be primed for a brief, perverse pop before resuming its death spiral to destruction.

Cuidado, mis amigos! Wink

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Re: Caution Light Flashing for Gold Longs, Dollar Shorts

Play the end game instead.

Its a sure thing.

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Re: Caution Light Flashing for Gold Longs, Dollar Shorts

So that must mean that since the bullish sentiment for the Zimbabwe Dollar is at zero I should expect that it will soon start up?Money mouth

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Re: Caution Light Flashing for Gold Longs, Dollar Shorts

MachineHead-

I just read where China is raising (or has raised) their interest rate by 25 basis points. I believe this was an effort to cool down their own economy. But wouldn't this DRAW capital from other lower-paying currencies, like the dollar? I think this would throw open the door for investors to say forget the dollar and embrace China. I imagine this is only the beginning of Chinese interest rate increases as they are caught in a "reverse swirl"- the opposite of the one we are in. As they pay more interest, more investors want that higher return, no?

Many thanks, in advance, for your comments.

 

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Re: Caution Light Flashing for Gold Longs, Dollar Shorts

China's interest rate hike would attract external capital, except that it has strict controls on incoming investment. Dollar-based investors have no legitimate way of buying Chinese government bonds, for instance, to speculate on a revaluation.

Meanwhile, there's a G20 meeting this weekend. Conceivably China would agree to a faster pace of yuan appreciation, if the US would refrain from trashing the dollar with a QE2 program. Tim Geithner might not be able to make or deliver on such a promise, since it's the Fed's decision. But the Treasury does have official responsibility for the dollar's exchange value. As an owner of a couple of trillion US dollars, China has reason to care about the dollar's future value.

Consider some recent Chinese economic releases:

Industrial output rose 13.3 percent in September from a year earlier, the statistics bureau said.

Urban fixed asset investment gained 24.5 percent in the first nine months of 2010 from a year earlier. That compared with economists’ 24.6 percent median estimate.

Retail sales rose 18.8 percent in September from a year earlier, the bureau said. Producer price inflation cooled to 4.3 percent.

http://noir.bloomberg.com/apps/news?pid=20601010&sid=aiJ_G_vYx9fo

This is the picture of an economy which is dangerously overheating. China is going to attempt that proverbial central bankster maneuver -- a 'soft landing' into sustainable, noninflationary growth. Their chances of success are low, as soft landings are rarely pulled off, owing to the lags inherent in monetary policy. China is hiking rates, increasing reserve requirements, tightening restrictions on property lending. They could end up unintentionally pushing their economy into recession.

Meanwhile, the other rich countries in the G20 -- especially Japan and the euro area -- would like see the dollar stronger against their currencies. Japan is teetering on the verge of recession and deflation again, while most of Europe is pursuing austerity policies. Exports are one of the few sectors which can give them a lift. In place of QE2, they would probably prefer direct fiscal stimulus in the US to boost the economy. We'll see.

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Re: Caution Light Flashing for Gold Longs, Dollar Shorts

Today the weak dollar is cited in an NYT article. From a contrarian perspective, when financial trends receive notice in the popular press, they are often well advanced.

This quote ought to set one's contrarian antennae to vibrating:

The dollar’s decline is being driven by what everyone in global markets is now expecting: another round of so-called quantitative easing by the United States. In the next few weeks, the Federal Reserve is expected to inject vast sums of money into the economy in another attempt to spur growth.

'Everyone' -- oh, my! Even yak herders in their remote yurts in Outer Mongolia are examining their hundred-dollah bills with suspicion.  Don't forget the old adage: buy the rumor, sell the news. But how many will be able to do that, as they peruse this horrifying chart, with the slope amped up to a near-vertical precipice? Aiieeeeeeeeeeee!!!

http://www.nytimes.com/2010/10/21/business/global/21dollar.html?hp

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Re: Caution Light Flashing for Gold Longs, Dollar Shorts
machinehead wrote:

Long term the dollar is doomed. But it could be primed for a brief, perverse pop before resuming its death spiral to destruction.

Cuidado, mis amigos! Wink

Long term, we're all doomed - don't short the undertakers. Smile  Brevity is relative.   To wit; For a brief time, the dinosaurs ruled the Earth.  For a brief time, Wile E. Coyote defied gravity.

I began going long the dollar a while back (note there are almost infinite ways to do this as virtually everything out there has behaved as a dollar short for a brief period) Thankfully the Eurozone is fully cured and running smoothly once again. Tongue out

If the Chinese data were believable and remotely accurate, the streets of Beijing would be rivers of lava. IMO China is attempting to stomp out the "local" competition - primarily their long time pals the Japanese..  A Yuan devaluation could be the end result if the dollar strengthened.   Their build of a very serious blue water fleet speaks volumes of their goals.

You can never anticipate the unexpected without transcendental analysis.

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Re: Caution Light Flashing for Gold Longs, Dollar Shorts

Regarding that first chart in this post...there we might note extreme swings in emotion that, like a heart palpitating wildly just before expiration, are drawing closer and closer.

How is it possible that the world's reserve currency, the one with trillions upon trillions of fluttering about the electronic skies, can go from 6% bulls to 93% bulls and back to 3% bulls in the space of 2 years....and then repeat the entire journey in the space of only a single year?

What does this tell us?  Has such extreme volatility in sentiment been seen the past and, if so, what were the results?

I thought that Monday's extreme pop in the dollar was just such a reversal in fortune as described above, but then Tuesday's complete reversal of said pop really got my attention.  It was as if all the sentiment-based  trading programs suddenly cried out in unison....a brilliant short-covering rally was pinched in the bud, and the long-awaited reversal did not come.

What do such extreme gyrations of a percent and a half or more on back to back days tell us?  

One interpretation might be that there's no love, no loyalty to any of the fiat currencies out there, only an increasingly desperate herd of traders looking for a sheltered canyon, hoping they don't accidentally stampede off a cliff or into a box canyon.

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Re: Caution Light Flashing for Gold Longs, Dollar Shorts
cmartenson wrote:

What do such extreme gyrations of a percent and a half or more on back to back days tell us?  

In my experience, it tells us that a reversal is imminent and that the current trend is exhausting itself. We have seen this same pattern over and over again throughout the last decade. The day-to-day swings in the stock market during this period have been very extreme at times. What is the impetus behind such moves; macroeconomic factors? central bank policy? crisis in the Euro? crisis in USD? nope, just WallStreet profits

As long as market participants hold a particular belief (or end-game scenario) as a 'sure thing', Wallstreet will find a way to make a profit from that belief. 

 

 

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Re: Caution Light Flashing for Gold Longs, Dollar Shorts
cmartenson wrote:

Regarding that first chart in this post...there we might note extreme swings in emotion that, like a heart palpitating wildly just before expiration, are drawing closer and closer.

How is it possible that the world's reserve currency, the one with trillions upon trillions of fluttering about the electronic skies, can go from 6% bulls to 93% bulls and back to 3% bulls in the space of 2 years....and then repeat the entire journey in the space of only a single year?

Within this year, at least, the strong bullish sentiment on the dollar in early to mid 2010 was when the Greek crisis was collapsing the euro. Today's bearish sentiment on the dollar derives from rumors of QE2, as the euro has recovered.

Given that the euro has the largest weight in the dollar index, this chart reflects sentiment on the euro, as much as it does the dollar. Nevertheless, swings in the dollar index have an impact on commodities, as Europe is a consumer on par with North America and thus plays a role in the price-setting mechanism, despite the reference prices being expressed in dollars.

For instance, euro gold remains under €1,000 an ounce, after comfortably exceeding €1,000 in May 2010. This is largely an artifact of the euro having strengthened against the dollar since then. But it means euro-based gold owners have seen no gains in the past few months.

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Re: Caution Light Flashing for Gold Longs, Dollar Shorts

this seems to back up the arguement, and I guess points to deflation in the short term.  Dollar may collapse but not, at least according to Jim Shepard, until dollar soars and gold sinks by hundreds of dollars in value. 

http://www.zerohedge.com/article/real-big-story-financial-markets-today…-which-no-one-talking-about

(may need to cut and paste into browser to open)

 

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Re: Caution Light Flashing for Gold Longs, Dollar Shorts

I wouldn't be to excited. I'm not expecting to much of a pull back. I'm reading that silver and gold are great investments longterm. Until the Fed raises interest rates, all they can do is talk tough. If they raise interest rates, unemployment would skyrocket!

Listen to the first guest. Gregory Weldon

http://www.netcastdaily.com/broadcast/fsn2010-1023-3.mp3

Also, some good info from Silverseeker; great interviews from Robert Kiyosaki & Louis Navellier in 2nd hour.

http://radio.goldseek.com/


 

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Re: Caution Light Flashing for Gold Longs, Dollar Shorts

I still think we could go into spiraling deflation which will crank the value of the dollar through the roof and dump gold into the dirt. There is too much overwhelming evidence this will happen when stacked up against the story of inflation and gold as it now stands. The side with the greatest odds is the one you go with. So, I'll go with deflation...especially since I am seeing it everywhere I look.  Sure, there are companies showing a profit for the 3rd quarter and the markets are in a very thinly traded bull run (I should say a bear rally)...but that's how this suppose to work. If that was not happening, then I would be very worried and not sure of my guru's call. The markets are behaving exactly as they should and always have just before a major crash. Nothing has changed...so why would they not crash again?

You can't get out of debt by going into debt to do so (which is what the Fed is trying to pull off). You can't have IN-flation unless money is in heavy circulation, its easy to come by, easy to borrow and most important EVERYONE IS SPENDING MONEY as fast as they can get their hands on it...they are not saving...they are not getting out of debt...they are going further into debt and employment levels are under 4.5%. and the inventory of homes for sale is 90 days or less to sell off. Banks stop failing. Bankruptcies fall to 1 in every 100,000 people and not 1 in every 1,000 now experienced. Plain and simple. When those things happen, you will have inflation, interest rates will go up, gold will go way up and if properly moderated, good times will be had artificially until it blows up into a bubble again.

Right now, banks will not lend money unless you are a perfect credit risk, have near perfect credit score and the loan is over collateralized. People are not borrowing money. They are saving money and deleveraging to get out of debt due to fear they will lose their job. Unemployment is approaching a double digit figure (and is 17 to 20 percent in real world without government manipulation). The inventory of homes for sale is a 23 month supply (it will take nearly two years of selling off homes to eliminate the inventory now for sale). Further, 1 out of 10 homes is in foreclosure. 3 out 10 homes are delinquent. This means, ultimately that 40% of all homes will end up being foreclosed on within the next 6 months (that's nearly half of the homes in America). This does not include commercial real estate, malls, apartments, office buildings, industrial complexes, etc. They will be much worse off than housing. 1 out of every 7 cars is delinquent (past due) in payments. By the end of next year, nearly 1/3 of all cars will be repossessed or their loans rewritten. 2 our of every 10 families use food stamps (the modern soup line) to acquire food or they would starve. This figure will go to 3 out of 10 by mid next year (nearly 1/3 of all Americans will be fed by their government through food stamps).

Anyway, you get my point...we are not in any kind of inflation. We are now in deflation which will spiral out of control quite soon.

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Re: Caution Light Flashing for Gold Longs, Dollar Shorts

Morgan Stanley warns of a potential dollar short squeeze:

If [risk demand] sentiment sees a sharper lurch to negative territory, there is a risk that we will see a bigger USD correction. [Read: a strengthening] Our positioning trackers, including the IMM and the MS Flows reports, show that USD net shorts have reached deep levels over the past few months (see Exhibit 5). 

Large positions like this are usually most vulnerable during bouts of deleveraging. Currently, the largest net long positions opposite the USD are AUD and MXN, as reported on the IMM. Our own flows also show a sizable USD/JPY net short base. Given a USD positioning squeeze, our sense is that these crosses would prove the weakest links.

Shorting the dollar has become a pretty crowded trade:


http://www.businessinsider.com/morgan-stanley-why-the-us-dollar-could-be-in-for-a-massive-correction-2010-10?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+clusterstock+%28ClusterStock%29#ixzz13kTihGS3

 

Morgan Stanley goes on to point out that the dollar's long-term fundamentals remain hopelessly bearish. Any short squeeze in the dollar would be a short-term event -- a few weeks or months of bear market rally, within the dollar's long march to devaluation and destruction at the hands of the Federal Reserve's expert saboteurs.

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Re: Caution Light Flashing for Gold Longs, Dollar Shorts

Two interesting Posts on Silver. I wonder if there will be a pull back in the metals or just the markets? Jon

Gold & Silver Commercial Signal Failure Today

Bloomberg regularly surveys traders in the gold market.  The amazing thing about this morning’s report is that 50% of the traders are bearish, while only 30% are bullish.  This type of sentiment can be seen across the board in gold, and that is why the metal of kings is set to explode through the previous highs.
 
October 29, 2010
    

The number of bulls in another survey has fallen to levels seen hundreds of dollars ago on gold.  Some readers may be asking why is sentiment so bad when gold is near all-time highs?  

The answer is really quite simple.  When you are in the midst of an explosive move to the upside, market participants and even many professionals watch in disbelief while it is happening.

As long as the pessimism prevails, the underlying financial instrument continues rocketing higher.  Gold has been strong but steady in its advance so far.  With massive commercial short positions, and sentiment this bearish, we now have the very real possibility that the gold market may become disorderly to the upside.

Overseas trading in gold has been weak so far with gold down $4 and silver off 13 cents.  This is a perfect setup for a huge bull move on Friday as trading moves to the United States.  You should start to see gold firm up by 5 am EST.  If some commercial covering begins, well, you better fasten your seat belts and hold on for the ride.  

The other monetary metal (silver), will most likely be leading today’s charge.  Remember, a commercial signal failure is extremely rare.  Today will provide us with a key piece of the puzzle to decide if this uncommon event is going to unfold.  If the commercials are overrun, it will occur much to the delight of hard money advocates around the world.

Eric King
KingWorldNews.com

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2010/10/29_G...

James Turk - Silver $30 in Less Than 18 Days

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2010/10/28_James_Turk_-_Silver_$30_in_Less_Than_18_Days.html

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Re: Caution Light Flashing for Gold Longs, Dollar Shorts

Insiders are dumping stocks at ridiculous levels:  http://www.zerohedge.com/article/insider-selling-surges-multi-month-high...

Machinehead noted above how shorting the dollar has become a very crowded trade.

The markets are anxiously awaiting how much QE will be announced at the the next Fed meeting.

To me, this looks like a perfect pump and dump setup.  Bernanke announces a weak number, and the market sells off.  This makes the insiders happy, since they're already out of the market.  This could also be the catalyst the reverses the momentum on the short dollar trade.

From a political perspective, engineering a market rally right before the election might buy a few votes for the beleagered Democrats.  If the market sells off like I predict, Bernanke can use this as an excuse to fire the big guns later on.  In light of the currency war going on, a strengthening dollar would give the exporting countries a bit of reprieve, at least until Bernanke fires up the nukes. 

Will gold and silver take a hit as well?  Most likely.  I certainly hope so!  Why pay full price when you can wait for the sale?

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Re: Caution Light Flashing for Gold Longs, Dollar Shorts
compinthegroove wrote:

Insiders are dumping stocks at ridiculous levels:  http://www.zerohedge.com/article/insider-selling-surges-multi-month-high...

Machinehead noted above how shorting the dollar has become a very crowded trade.

The markets are anxiously awaiting how much QE will be announced at the the next Fed meeting.

To me, this looks like a perfect pump and dump setup.  Bernanke announces a weak number, and the market sells off.  This makes the insiders happy, since they're already out of the market.  This could also be the catalyst the reverses the momentum on the short dollar trade.

From a political perspective, engineering a market rally right before the election might buy a few votes for the beleagered Democrats.  If the market sells off like I predict, Bernanke can use this as an excuse to fire the big guns later on.  In light of the currency war going on, a strengthening dollar would give the exporting countries a bit of reprieve, at least until Bernanke fires up the nukes. 

Will gold and silver take a hit as well?  Most likely.  I certainly hope so!  Why pay full price when you can wait for the sale?

I sold all my gold this morning. I figure like you, this is a set up. Just to add a note. Goldman Sachs stated that the QE should be no less then 4 Trillion and if it falls short the markets could take a hit. Goldman and the Fed work together in my opinion. Will know in a few days.   

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Re: Caution Light Flashing for Gold Longs, Dollar Shorts
investorzzo wrote:
compinthegroove wrote:

Insiders are dumping stocks at ridiculous levels:  http://www.zerohedge.com/article/insider-selling-surges-multi-month-high...

Machinehead noted above how shorting the dollar has become a very crowded trade.

The markets are anxiously awaiting how much QE will be announced at the the next Fed meeting.

To me, this looks like a perfect pump and dump setup.  Bernanke announces a weak number, and the market sells off.  This makes the insiders happy, since they're already out of the market.  This could also be the catalyst the reverses the momentum on the short dollar trade.

From a political perspective, engineering a market rally right before the election might buy a few votes for the beleagered Democrats.  If the market sells off like I predict, Bernanke can use this as an excuse to fire the big guns later on.  In light of the currency war going on, a strengthening dollar would give the exporting countries a bit of reprieve, at least until Bernanke fires up the nukes. 

Will gold and silver take a hit as well?  Most likely.  I certainly hope so!  Why pay full price when you can wait for the sale?

I sold all my gold this morning. I figure like you, this is a set up. Just to add a note. Goldman Sachs stated that the QE should be no less then 4 Trillion and if it falls short the markets could take a hit. Goldman and the Fed work together in my opinion. Will know in a few days.   

If a dip in the metals happens, I don't think it'll last very long.  Traders in Asia, not to mention central banks from around the world, are on the hunt.  Any price dip will be eagerly snapped up.  You may end up regretting selling your gold. 

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Re: Caution Light Flashing for Gold Longs, Dollar Shorts

Won't be the first time. I kept my silver. Longterm play. It's just that everyone is so sure the markets are headed up. I see the Fed doing everything to support the dollar. Insiders selling. Money on the sidelines in money markets. Markets are being manipulated around the world. We have yet to have any kind of pull back.

Marc Faber recently in an interview with bloomberg said that  anything less than $1 trillion From Bernanke could disappoint investors and might prompt a correction in U.S. stocks. Marc Faber, managing director of Marc Faber Ltd publisher of the Gloom, Boom & Doom report, and Barron's Roundtable member, anticipates meaningful market correction in 2010. Mining and agriculture will be top performers within commodity sector.Marc Faber is currently recommending agriculture commodities, and the accumulation of precious metals although he does no roll out some correction before the end of the year before the prices shoot up in 2011

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Re: Caution Light Flashing for Gold Longs, Dollar Shorts

I've been waiting for a dip for what seems like a long time.  There hasn't been one since 08-09 when there was stiff resistance at 1000.  Since it blew through that level in about Sept. 09 there hasn't been any looking back.  Up about $360 in a little over a year.  There seems to be a new interest in the shiny stuff from a wider market that could just keep driving the price higher for some length of time.  Still, It's hard to believe there won't be a significant correction.  Perhaps if the msm is convincing enough with the happy talk, there might be a pullback in AU before the economy does another swan dive.  So hard to figure this stuff.

Doug

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