The USD index has rallied strongly over the past few months and is now testing the psychologically-important 100 level for the second time in 2015. During March, a sharp rally brought the USD index to 100.04, but it quickly turned lower and fell back to 93. After bouncing around in a range for the past six months, the USD index has once again broken above the 100 level. In fact, it just made a new 2015 high at 100.22.
The relative strength index (RSI) for the dollar index is nearing overbought territory (70), but has room to run before hitting previous highs above 80 that were reached earlier in the year. With the increased likelihood that the FED will raise rates in December, the USD may be able to hold above the 100 level and continue pushing higher in the coming weeks and months.
We will be watching the dollar index closely, as the direction of the USD is a major driver of the gold price. If 100 acts as resistance once again and the USD index turns lower, we can expect a short-term rally in precious metals. This type of double-top technical pattern would be a bearish indicator for the USD dollar index and bullish indicator for gold. The classic double top reversal marks at least an intermediate change, if not a long-term change, in trend from bullish to bearish.
Gold is rallying today, up $7 or 0.7% to $1,064. However, the price remains below key support at $1,072 which was violated last week. This price level of $1,072 was the prior 2015 low that occurred in July. The recent dip to $1,056 not only marked a new low for the year, but also represents the lowest price point since early 2010.
This dip increases the chances that gold will test $1,000 in the near term and could drop into the $850 to $900 price range before finally bottoming, as deflationary forces pick up momentum. So, I am somewhat bearish in the short-term and we have taken the necessary steps in the Gold Stock Bull portfolio to reduce exposure and protect capital.
In the longer-term, I expect the FED will be forced to reverse course on interest rate hikes and introduce new stimulus in order to keep the economy from collapsing. The unprecedented levels of debt and central bank intervention will eventually lead to high inflation, but I believe the economy will continue into a deflationary spiral before this occurs.
With the demographic shifts taking place and destruction of the middle class, I expect trouble ahead for the stock market and have already started to position our portfolio to profit from this scenario. I believe it is prudent to begin preparing for dark days ahead in the stock market, bond market and real estate market. With geopolitical tensions continuing to heat up and the chances of a major war increasing, it is more important than ever than investors make some common sense preparations to ensure they can weather the storm.
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