Gold Crash, or USD Bear Market Rally?

In early September, gold was over $1900, and seemed ready to push for the $2000 level. By the end of September it had fallen to $1650, after dipping as low as $1550. Since then, it has continued to trade in the mid-1600s. Is this the beginning of a gold crash? Is the "gold mania" now behind us?

Back in March, I discussed the Half Life of the Dollar. In that article, I pointed out that the USD has been losing half of it's value every four years… and that trend remains solidly in place. But currency value decay, like radioactive decay, only appears smooth and steady when you stand back and look at the overall curve. Examined in fine detail, it comes in fits and starts, and with plenty of ups and downs!

USD prediction chart

A short-term uptrend in the midst of a long-term decline is known as a bear market rally. What might such a rally look like this time?

The USD's 200 day moving average is now 20.6 mg, implying a $1510 gold price – a level we have almost reached. If that resistance level is tested and holds, the rally may be over soon.

But when the USD hit its all-time low of 16.4 mg on September 6th, it was almost 24% below the level predicted by the half-life decay curve. In order to return to the curve, the dollar would have to rally to 21.4 mg – equivalent to a gold price of $1450 in USD. And there is no reason a rally should stop there; some overshoot should probably be expected before gravity reasserts itself and the USD resumes its downward trend. An "equal and opposite" over reaction of 24% could carry the USD to 26.5 mg – equivalent to a gold price of $1172.

Concerns about Europe and a global economic slowdown are causing investors to shift away from risk and towards the safety of cash positions. For some, this means liquidating gold positions. But for many, it means adding to gold positions. Metals without gold's monetary pedigree, especially silver and platinum, will probably trade lower in gold terms, creating significant buying opportunities. Resource stocks may also be hit hard, giving buyers a chance to scoop them up at bargain prices.

There are absolutely no signs of any real fiscal or monetary reforms anywhere in the world. Even the Swiss have abandoned their conservative economics and pegged the CHF to the EUR – tying their currency to a sinking ship. The tsunami of money creation I expect to see in the next few years will sweep all of the world's government controlled currencies to new lows… And you want to be on the high ground of gold and other tangible assets when that wave hits.

Take full advantage of this rally in the USD, EUR, and other paper currencies to maximize your risk-free gold holdings and increase your exposure to assets that will grow in gold value as governments seek to outdo each other in providing economic "stimulus" in the months ahead.

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