The US$ Riddle

In February-May of this year we witnessed the development of a diamond pattern on the dollar chart - which turned out to be a "continuation" pattern.

The chart below evidences a diamond "reversal" pattern - from which the dollar is now breaking up. (Courtesy: decisionpoint.com)

There are three technical reasons why we can confidently interpret this as a reversal pattern:

• On Friday, the index actually did break up from the diamond
• The PMO broke up through its Moving Average a few days ago, and we now have rising bottoms ( a rising trend) on the PMO
• Although the dollar index itself reached a lower low than in June, the PMO showed a "non confirmation" by rising from a higher low.

Technically, the probabilities thus favour a closing of the gap at around 94.

What does all this mean for gold?

The following is a Point and Figure (3 Box, 2.5% reversal) chart of the US Dollar relative to gold (courtesy stockcharts.com)

It shows clearly that - in 2001 - the Dollar turned down relative to gold, and has since entered a bear trend that currently has a very low probability of reversing.

What is also apparent from this chart, however, is that the RS chart is far from its trend line, and some consolidation is in order. Consolidation is further called for by the fact that the "measured move" - which was called for on the breakdown of this chart below the 255 level - has now been reached.

Does this mean that we should "buy the dollar and sell gold"?

What are the gold charts telling us?

At face value, the message here is both surprising and ambiguous:

It is surprising, because the measured move from the breakout at 370 has not yet been reached (measured move target remains at around $408).

It is ambiguous because the chart is showing a double top formation - which reflects a potential resistance area.

A clue to the eventual outcome can be found from the Commodities chart below:

This chart - which I have modified to a 5% reversal chart to emphasise the power of the move - shows that the $CRB entered a bull trend in 2001, and its measured upside move target is very far from being reached (It should rise at least a further 20% from these levels, ignoring the backing and filling that will doubtless occur in the interim).

The relative strength chart of Gold vs Commodities is a chart to which I have referred several times over the past few months.

I am showing it below in the 2.5% reversal in order to emphasise the important fact that whilst gold has been in a bull trend relative to commodities since 2001, it has yet to reach the relative levels of the period 1990 - 1994. - ie Gold is still behaving within the bounds of a commodity.

An interesting fact which flows from this chart is that ITS measured move target will take the relative strength chart back up to the 1840-1880 level. - ie it can still rise by a further 15% from these levels.

Now THIS is a very interesting observation - because the combination of this measured move target - AND the measured move target for the $CRB , indicates that technically, gold appears to have significant upside potential.

Putting some numbers to it:

The $CRB looks like it could rise by 20% from these levels

Gold could outperform the $CRB Index by around 15% from these levels

$380 X 1.2 X 1.15 = $524 - which, incidentally, is roughly what the Net Present Value methodology valuations of some important Gold Shares were implying some months ago.

The charts are CLEARLY pointing to a market which is anticipating that inflation (in US$ denominated prices) will win the day.

In this context, a bottoming US$ is very confusing:

How is it possible that US dollar price denominated commodities and US dollar denominated gold could rise strongly, whilst the dollar itself could ALSO rise (or at least not fall) for the foreseeable future?

I'm afraid I'm going to have to pass on this one for the time being. At face value, something is out of kilter. I can't yet see what it is, and I will need to ponder this particular market riddle for some time.