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Gold and Silver Crushed by Unwinding US Dollar Shorts

Commodities / Gold & Silver Aug 16, 2008 - 11:39 AM GMT

By: Mike_Shedlock

Commodities Best Financial Markets Analysis ArticleWhat's happening with gold should be no real surprise. Although I have stated many times that gold is money and gold should do well in deflation, and we are in deflation (see The Future Is Frugality and Implications of the Slowing Global Economy for the deflation case), in the initial stages of deflation, leverage in everything is reduced by force.

There are thousands of hedge funds, pension plans, and individuals over-leveraged in a massive bet against the US dollar and US assets in general. Many themes of the past 7 years are now being unwound. And one would expect leverage to be forced out in deflation as credit simply dries up. I call this the great unwind.


The Great Unwind

  • Short US Dollar - Long Commodities
  • Short US Dollar - Long Foreign Equities
  • Short Financial's - Long Gold
  • Short US Equities - Long Foreign Equities

Gold will reassert itself eventually along with the short financials trade, but as the great unwind continues, the unwinding process for those in gold can be painful.

The reason gold will reassert itself is that Gold Is Money. For more on Gold As Money, please see Misconceptions about Gold and Why does fiat money seemingly work?

Bear in mind that gold disconnected from the US dollar in 2005 for the entire year, so it could do so again. Furthermore, there is really no way to tell just how long the unwinding can last. However, given that commodities were essentially a one way bet for the last seven years, the unwind can last a lot longer than commodity bulls might think.

Gold and Silver Seasonality

Another factor to consider is gold and silver seasonality. August through January is generally a very favorable timeframe from gold and silver, so that might (or might not), slow or even reverse the effects of the unwind.

One additional point is that silver, unlike gold, might easily act more like an industrial commodity and less like a currency than gold. Gold's primary role is that of money. Silver is a higher risk/higher reward offering when it comes to deflation.

Euro vs. Dollar Weekly



The Euro has broken the weekly trendline, but barely. Unless it reasserts itself, a drop to the 200 day Exponential Moving Average (EMA) near 137 might reasonably be expected. There is also support at that level from the last major breakout.

Manipulation Theories Debunked

Many claim that that dollar was rising because of manipulation. Such claims are completely baseless and were totally debunked in Currency Intervention And Other Conspiracies with a followup in the second half of Fannie, Freddie Common Stock Is Now A Call Option .

Commodity Supercycle Intact

It is likely that the commodity supercycle is still intact. Oil is not headed back to $30 although a move back to $70 ore even lower can easily be in the cards.

However, commodity bulls are likely severely underestimating both the great unwind and the Implications of the Slowing Global Economy . A cyclical downturn in commodities is clearly underway.

Gold Manipulation?

There are now screams of "gold manipulation" just as there were currency manipulation. I will not suggest there is no manipulation, but I will suggest that manipulation if and when it occurs does not work.

I had an interesting Email exchange with Nick at Sharelynx Gold just a few days ago over manipulation claims. We were discussing gold's rise to $1000 and Silver's rise to $20. Nick commented "I agree about the bit that if we've had manipulation from gold at 250 up to now then bring on more of it.(:-)))"

There is no reason to believe that dollar manipulation or gold manipulation is the driving force behind movements in gold, silver, and currencies. Never believe conspiracy theories or screams of manipulation when far simpler explanations such as the Great Unwind explains things quite nicely.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2008 Mike Shedlock, All Rights Reserved

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