Stock Market and Gold Crash, Are We About to Repeat 2008?
Stock-Markets / Financial Crash Dec 07, 2009 - 09:34 PM GMTBy: Graham_Summers
A few weeks ago on November 10, I wrote an article Three Reasons Gold Might be Making a Head Fake.
In it, I noted that Gold’s recent rally was largely due to Dollar devaluation (Gold had failed to hit new highs in other world currencies) as well as several other factors that disconfirmed the precious metal’s explosive rise. I wrote:
Unless we start seeing confirmations of Gold’s breakout coming from other precious metals or gold mining stocks, then we could very well see Gold stage a massive reversal in the near-term. A Dollar rally (which I believe may be starting) would certainly hit Gold hard since most of the precious metal’s gains have come based on Dollar devaluation (see Reason #1 above).
Last week, Gold proved my point staging a sharp reversal falling 6% in two days’ time. Those caught on the wrong side of this trade got absolutely obliterated.
The reason for the reversal? A sudden, and sharp US Dollar rally (which I also predicted on November 11). Indeed, last week the “short the Dollar, go long everything else” crowd got hammered when the Dollar rallied more than 2% in a little less than 48 hours.
The question now is whether last week’s carnage was a mere blip in the continued Gold rally/ Dollar drop or if this is indeed the start of something more significant. To determine this, we’ll take a look at the bigger picture for both assets.
Since Gold’s rally is hinging on continued Dollar weakness, we’ll start with the Dollar first. Below is one year chart for the US currency:
As you can see, the Dollar has been in a steep downtrend since March 2009 when the Federal Reserve announced its Quantitative Easing program. Since then, we’ve seen multiple rallies to the 50-day moving average, but NO real test of that level until last week.
Taking a closer look at last week’s action, we see that the Dollar has staged its first real breach of its 50-day moving average. This is MAJOR as it is the first time the Dollar has achieved anything resembling REAL strength from a technical analysis standpoint in well over nine months.
Indeed, when we draw in the trend line for the Dollar, we see that we ALSO got a clear break of its downtrend. This development is also MAJOR since the trend-line has served as a point of resistance no less than nine times since May. To see the Dollar break above it AND the 50-day moving average is a strong indicator that this is no mere head-fake and may well in fact be the start of a serious trend reversal.
This is absolutely critical because it was a Dollar rally that CRUSHED stocks and commodities last year. Indeed, the first major warning sign of the October-November nightmare was the Dollar catching a bid, a process that began a massive short-covering in the US currency (the entire world was borrowing in Dollar or Yen at the time) which kicked Oil (black) and stocks (blue) in the teeth as more and more investors piled into the greenback on an increased flight to safety (see below).
I call it Financial Crisis “Round Two” Survival Kit. Not only can these investments help protect your portfolio from the coming carnage.. they can ALSO show you enormous profits: they returned 12%, 42%, and 153% last time stocks collapsed.
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Good Investing!
Graham Summers
Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets.
Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.
Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.
© 2009 Copyright Graham Summers - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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