August 9, 2004
by Jim Sinclair
Forget everything you’ve learned in the past about gold to understand it in today’s marketplace.
Gold declined because the dollar rose based on one item only: The highly advertised intentions of the Federal Reserve to close the gap between inflation and interest rates.
That is not what a bull market in the dollar or a bear market in gold is made of but it could have provided an interim rally in the dollar for a few months.
Economic indicators have been mixed for over two months. Analysts do not think in dynamic terms of momentum but rather in statistical static terms so to them deceleration in the economy is meaningless. Economists are disciplined, mistakenly IMO, to look at the economy as pictures in time and therefore statically.
The dollar was rallying and in the process of building a Reverse Head & Shoulders that might have taken it into the higher 90s. But the release of the unexpectedly poor jobs report was to the static thinking economist much like throwing cold water on an amorous teenager as he waits at the front door for your daughter. It puts the miscreant into total shock and perhaps reality.
So the question begs to be asked: Is this the big move up in the gold price and the big move down in the US dollar? Equally as important a question is at what point does the US dollar return to a full blown bear market from which rescue is uncertain to impossible?
The Reverse Head & Shoulders that might have carried the dollar temporarily higher was technically put into question by Friday's violation on the downside of the right shoulder low which exceeded the low of the left shoulder. There is a point that the dollar will reach when gold will, IMO, be taking out $433 on its way to and above $480.
You know that I see this as being inevitable. It might have been delayed into fall if it were not for the jobs report and the dollar reaction.
Later today we will review the all important technical position of the USDX as it is more causal to the gold price than all the fundamental or technical information that can be gathered on gold at present.
We know that the global economy has lost its momentum. We also know that there is no such thing as old and new economics. The Accelerator Theory of Business Activity is as valid now as it was in what the wunderkinds think was the dark ages of the Austrian School of even the more recent Chicago School Monetary Theory.
The Accelerator Theory of business Activity states that an economy must accelerate at an accelerating rate or it is declining. A declining economy must accelerate on the downside or it is appreciating. Simply stated, the US and therefore the world economic recovery is over according to the Accelerator Theory of Business Activity. Sorry wunderkinds.
So we can now expect that positive economic reports will be the exception rather than the rule and therefore the downside on the dollar will be the exception move and the rally into the fall will not occur.
The above conclusion is totally free of any terrorist activities for the balance of the year. Therefore I believe it is better to be committed in gold than not committed. It is not a question of how high the Federal Reserve will take interest rates now but rather will they do their world class face save and increase rates by 1⁄4 point this week.
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