A Massive Gold Rally Is Underway

By: Deric O. Cadora | Thu, Feb 24, 2011
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Recent action in both equity and currency markets seem to be coagulating around an idea I first proposed last summer. That idea calls for a minor currency crisis, centered around the dollar's decline, to simultaneously bring an end to the cyclical equity bull market which began in 2009. Periods of uncertainty and turmoil tend to bring down stock prices, and I expect the result to be no different when the turmoil is dollar-centric. The dollar is now on the verge of confirming its breakdown.

US Dollar Index

Typically, a weak dollar would be expected to drive equity prices higher, but as stated above, the suspicion is that when the decline is extreme, traders will seek safety rather than speculate. Is it any small coincidence that the S&P 500 is piercing its intermediate trend line just as the dollar is threatening to break down?

S&P500 Index

I suspect that once the big boys realize the jig is up, they will be pounding down every exit door in sight. Another test of the 75-week moving average might be in store for the near future.

So, if a flight-to-safety is to ensue, what asset will money seek if the traditional target of flights-to-safety... the dollar... is the asset causing the panic? Precious metals seems to be the most likely answer.

Gold

Gold needed less than a month to recover most of the $120 drop out of its December high... and the dollar hasn't even broken its trend line, yet. As I detail in the Member Letter, gold rallies tend to accelerate during each of the daily cycles contained within a larger-degree rally. Furthermore, gold and silver markets are quite thin compared to, say, the Treasury market, which usually receives the bulk of safety-seeking capital. Treasuries can easily absorb such inflows, but with the dollar taboo, Treasuries will be panned, as well. Cash is headed toward real money, and there is no way precious metals will absorb a panic-level volume of capital without a massive price adjustment.

The stage is set for the largest precious metals rally of the bull market.

 


 

Deric O. Cadora

Author: Deric O. Cadora

Deric O. Cadora
theDOCument.com
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Deric Cadora

Deric O. Cadora is the editor of The DOCument, a daily newsletter offering equity and commodity market cycles analysis, macroeconomic discussion, and general market commentary. Deric is a professional trader and a General Partner of The Rutledge Group, a managing partner of a commodity-centric investment partnership. His investment and trading experience spans two decades, during which time he formed and served as principal of a broker-dealer, managed a long/short book on the proprietary trading desk of Citi Capital Markets, worked as an independent trader, and currently serves as Chief Portfolio Manager for a commodity-centric investment partnership.

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