Gold Forecast: Is there An alternative To The US Dollar?

Gold finished last week down $3. It is down for the month and for the year so far. No matter what geo-political or financial disaster seems to be thrown at it, it still seems to continue on a steadily bearish course.  Consequently, we expect gold to fall during July.

Despite the constant calls for an epic meltdown over the last few years, here we are with the dollar top of the class again.  It may be the best of a bad bunch but that’s enough reason for its recent outperformance. This dollar strength has come as no surprise to us as we have been warning of a bear market consolidation in gold -- and that sentiment had changed for the time being.

Our fractal pattern analysis shows that gold is still in a multi-decade bull market. But like all markets, excessive optimism is usually accompanied by excessive pessimism. It should come as no surprise that at times of global turmoil, the Dollar is bid up and retains its status as the go to risk-off asset.

The dollar bears and gold bulls may have egg on their faces at the moment, but they do have one thing right.  At some point the dollar will end up like previous reserve currencies.  However,  knowing when or how such an event may play out is the tricky bit. We believe our long-term fractal analysis holds some of the clues as to when this may occur…but not quite how it is going to happen.

There are two potential scenarios that could unfold as gold sentiment returns to its long term bullish bias, firstly a re-emergence of the Euro as a potential successor to the dollar. Improbable as it may seem, the Euro is still the second most widely held currency in the world and although its global attractiveness has dropped in recent years it is still far more widely held than any of the other contenders.

The Euro has the next best credentials to replace the dollar as the global reserve currency.  But barring a sudden adoption of a fiscal union, it hasn’t got a chance at the moment. Watching Europeans dumping Euro bank credits and buying up goods to avoid the same confiscation of savings we have already seen in Cyprus should be of concern to all individuals, who lend currency to insolvent banks (deposits) in whatever jurisdiction they reside.

But there is another contender for a reserve currency (money), one that isn’t created at will by central banks and one with a long-term history of reigning in the political classes and imposing fiscal discipline.  This second scenario is of course Gold.  We believe that gold is in a multi-decade bull market precisely because all currencies are becoming unsound through the same financial system being propped up by political and social ideologies that have driven Euro zone inhabitants to repudiate their own bank credits in such a blind panic.

What we will be looking for is a bottom in gold price in dollars and a rise thereafter in all currencies. The market itself will impose discipline on an overly complex global financial system well past its sell by date, propped up by a political ideology addicted to debt and spending on social experiments designed to provide bread and circuses to the masses.

So for the moment the answer is there is no alternative to the dollar. It is the king of the currencies and will remain so until sentiment switches away from currencies towards money as an alternative to an IOU from the bank. When the market loses faith in banks and financial institutions and values the return of their savings above a return on their savings,  then we may see sentiment once again align with fundamentals.

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