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Neutral Dollar is Bearish for Gold

Commodities / Gold & Silver Jun 03, 2008 - 06:14 PM GMT

By: Ned_W_Schmidt

Commodities As is readily apparent, the Gold market had been living this past year in those rare best of times. Federal Reserve was on a determined course to lower interest rates. That encouraged selling of U.S. dollar, pushing it down in value. At the same time, a mini mania developed in paper oil market. While no shortage of physical oil could be found, the paper oil market moved higher. Those factors emboldened Gold traders to bid the metal higher.


At the same time some connection was made between commodity prices and the value of the dollar. Together these forces pushed $Gold to an unsustainable level. That rally reversed itself, and $Gold continues to consolidate in a trend toward lower prices.

As this week's chart shows, the U.S. dollar has been moving sideways for a number of weeks. The plots in that graph are end of week observations. Current condition of U.S. dollar would have to be considered as neutral, neither over bought nor over sold. With the Federal Reserve moving to a neutral position on U.S. interest rates, few are motivated to sell the dollar. Paper oil prices have apparently peaked, at least for short-term. And yes, even small children in Tibet have heard the consensus view that oil supply is 85 mmbd and demand is 87 mmbd. If that were true, the news media would be filled with stories of riots over oil shortages. Since none of these reports exist, we must assume that the consensus oil view is in error.

That leaves $Gold in the position of having no reason to not finish the consolidation in which it is caught. The longer term, yes, is extremely positive, for the dollar's essential problems remain. Investors would be better served by waiting for price weakness to add to their holdings, rather than chasing Gold when it moves higher on some day's hot news.

By Ned W Schmidt CFA, CEBS

Copyright © 2008 Ned W. Schmidt - All Rights Reserved

GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report , monthly, and Trading Thoughts , weekly. To receive copies of recent reports, go to http://home.att.net/~nwschmidt/Order_Gold_EMonthlyTT.html

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