Gold

If Columbus had turned back, no one would have blamed him. Of course, no one would have remembered him either.

 

– Source Unknown

We provided many reasons in the last few articles for the potential for the dollar to rally strongly and for Gold to possibly mount a rather strong correction.  We did however, forget to mention the following data in our articles, even though we spoke of this to our subscribers. This is data is very relevant even as when combined with the prior facts mentioned in the previous articles clearly illustrates that all is not well.

The first massive anomaly was the fact that while Gold went on to put in a series of all time new highs, the dollar instead of putting in a series of all time new lows, actually was trading roughly 4% higher from its all time low when Gold hit 1227.  The second anomaly is revealed in the following charts.

hui1
Click to enlarge

xau
Click to enlarge

gdx

Click to elarge

While Gold went on to put in a series of new all time highs, the XAU, HUI and GDX instead of matching bullion highs failed to trade to new highs. At the very least the Gold bugs Index (HUI) should have put in 1-2 new highs. The fact that all 3 failed to put in a series of new highs is a very powerful intra market negative divergence signal, and such signals generally lead to strong corrections.

The dollar on the other hand, instead of trading below its March 2008 lows actually traded 4% higher, the majority are still against the dollar (though this stance is softening slightly now) and think it's going to continue falling with no counter move in between and if that's not enough we have the above developments.

Conclusion

There are so many facts that clearly validate that Gold should continue to rise and the dollar should sink into the dust. However, the worst news for now has been priced into the dollar and when too many people start to take an extreme view, a turnaround is usually close at hand.  Given the fact that the Dollar has mounted an impressive rally in the last few weeks and that there are so many large discrepancies surrounding Gold's surge to new highs, caution is warranted.

The correction in Gold will only gather steam if a weekly sell signal is generated. So far, it has generated a daily sells signal and if a weekly sell signal is not generated then Gold will most likely trade no lower than 990.

Investors should keep the following facts in mind that even though the odds are rather high that the dollar is going to mount a strong rally, the long term picture for the dollar is still rather bleak. We are not long term dollar bulls, and we have not changed our long term views on the precious metal's sector. Over the long term, we still remain very bullish on this sector.

The mode in which the inevitable comes to pass is through effort.

Oliver Wendell Holmes, 1809-1894, American Author, Wit, Poet