THE INFLATION TRADE IS ON: BERNANKE HAS BROKEN THE DOLLAR RALLY

It may not seem like much happened yesterday, but a very important event occurred. Yesterday the dollar index breached 78.65. The reason that is significant is because 78.65 marked the intraday low of the prior daily cycle. A penetration of that level indicates that the current daily cycle has now topped in a left translated manner and a new pattern of lower lows and lower highs has begun. Any time a daily cycle tops in a left translated manner it almost always indicates that the intermediate cycle has also topped.

In this case it would indicate that the intermediate dollar cycle topped on week two and should now move generally lower for the next 10-12 weeks, bottoming sometime in late June or early July, about the time Operation Twist ends



Now that we have confirmation that Bernanke has broken the dollar rally I’m confident in calling April 4th an intermediate bottom (B-Wave bottom) in the gold market. Gold should now be entering the consolidation phase of the next C-wave. I expect a test of the all-time highs sometime this summer as the dollar moves down into its intermediate bottom.


 

That being said I have no interest in a 15% rally in gold. The real money will be made as the mining stocks exit their bear market, re-enter the consolidation zone between 500 and 600, and move up to retest the old highs. It’s not inconceivable that we could see a 30-45% gain in mining stocks over the next 2 1/2 months.

Sentiment in the mining index has reached the same levels of bearishness that were seen in the fall of 2008. That black pessimism drove a 300+ percent rally over the next two years. I have little doubt this time will be any different.

Now what we need to see is a change in character. We need the mining stocks to stop generating these sharp bear market rallies and transition into the wall of worry type rally that characterizes a bull market. So far that is exactly what is happening. The miners are rallying very hesitantly, and as long as this continues it will camouflage the move and keep sentiment depressed. That’s exactly what we need to happen to drive a long sustained rally back up to the old highs. 

The problem with the rocket launch type rallies we’ve seen over the last year and a half is that they swing sentiment very quickly to the bullish side and we run out of buyers.

As long as the bottoming process proceeds gradually I think there’s a very good chance the HUI could break back above the 200 day moving average, and possibly test the 600 level by mid-July.



So far all of the pieces are starting to fall in place to initiate the very early stages of what I think will eventually become another huge momentum move similar to what happened in silver and gold last year. Ultimately culminating in a parabolic blowoff top sometime in late 2014 as the dollar moves down into its next three year cycle low.

Now is the time to invest in this sector as it struggles to transition from a bear market back to the secular bull trend. The time to enter is at the very beginning when no one believes. This is when the really big money is made. If you wait till your emotions give you the all clear, half the move will be over.

Most traders are going to jump back into the general stock market, or tech stocks. You have to be smarter than that. The stock market, including tech, have already generated a massive move out of the October bottom. That kind of move usually leads to a multiweek, or month, consolidation. The odds of another 20 to 30% rally in the stock market are very slim.

The odds of a 20 to 30% rally as the mining stocks resume the secular bull trend are extremely high.

The combination of extreme downside momentum, and irrational human nature has created the kind of oversold conditions and extreme undervaluation that generates an opportunity that only comes around once or twice a decade.

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58 thoughts on “THE INFLATION TRADE IS ON: BERNANKE HAS BROKEN THE DOLLAR RALLY

  1. Shawn

    So whatever happened to Stock Market IT Top and bringing down everything with it?

    Those got thrown out now with a $0.01 cent breach of the $USD low? How about the Feb/March 2012 IT low of $USD? It will be too late to wait for confirmation?

    Thanks

  2. Gary

    It’s not a 1 pip move that’s significant its the reversal to a pattern of lower lows and lower highs this early in an intermediate cycle.

    The stock market just had an IT. It was very brief. That’s the consequences of mountains of liquidity and the Fed breaking the dollar rally. As long as we remain embroiled in a currency war one has to be prepared for anything, and expect conditions to change on a dime.

    As long as nothing goofy pops up in the currency markets the outlook ahead is for inflation until the dollar finds it’s next intermediate cycle low.

  3. Bill

    Really nice post, Gary.

    Techincals aside for a moment, fundamentally, the news sure looks bad for Europe/Spain/etc. This made me think that the Euro would fall and the Dollar rise. Just fundamentally. Do you have thoughts about this? What would fundamentally cause the dollar to sell off and the Euro rise?

    Again, the tech picture you paint out, w/sentiment, looks really good. I sure hope for it. Thanks again.

  4. Danno

    Correction. I said “…but I would resist getting overly stressed about it.” I should not have said that, as that is a prediction and I don’t make predictions. It pays to be wary until price proves what it wants to do.

  5. Gary

    Just due for a bounce out of a daily cycle low. Now that the pattern has been reversed we should see the dollar fail to rise above the April 16th high before rolling over and making another lower low. Stair stepping down so to speak.

  6. Tiho

    Did you mean by inflation trade that the USD long trade is back on? Haha joking, but still it is as if the dollar waited for to do the post before it reversed.

  7. Dang

    Thanks Gary!

    I’m just working with my 401k and really only have the SP500 to invest with (currently in cash).

    Is the dollar breaking a sign that I can start thinking about getting in the SP500 again?

    1. Gary

      That’s a tough one. At some point rising inflation is going to cripple the economy and the S&P will drop along with the dollar, plus the S&P has already had a huge move. The only place I’m comfortable putting money right now is in the precious metal sector.

    2. Dang

      That’s what I thought you’d say πŸ™‚

      What about short term (with finger on button, ready to trade out)?

    3. Gary

      I think the S&P is going to be in a trading range for weeks or months consolidating the big move out of the Oct. low. So I don’t think there’s much to gain in that area right now.

    4. Dang

      at ease, nothing only the SP (and variation of).

      If I had TGLDX or FSAGX, I wouldn’t feel so trapped in a box like I do. It seems with our plan you are either in the market or out, most people I work with don’t event realize they can park their money πŸ™

  8. Gary

    Knew the dollar was due to put in a daily cycle low at any time. It could either have done it on the employment report or yesterday as it turns out.

    Last month a poor employment report turned the dollar down in a left translated manner. It may do so again this time.

    1. Gary

      Who said anything about crashing? I expect it to continue consolidating. Which should include a mild move down into the next intermediate cycle low.

  9. Bill

    Gary, on the weekly charts, it looks like the DOW, S&P and Nasdaq are all topping. If they fall, and hard, wouldn’t that take out the PM sector along w/it? I remember that was a concern before. Or maybe that’s off the table now, and the only concern is the falling dollar. Thanks.

    1. Gary

      This is why I don’t rely on charts. I really doubt you are ever going to make any lasting money in the markets with just a subscription to a charting service. You need to understand cycles and sentiment. Charts are only used to time entries once the other two have given a signal.

  10. Bill

    You know, these currencies $USD and $XEU have just gone a choppy sideways since early 2008 (see monthly charts). I’m not sure that it’s still valid to follow the dollar to predict gold’s next move.

    On the daily charts, both the $HUI and $SILVER have been making lower highs and lower lows. However last week $GOLD put in a higher low. It still hasn’t broken out to a higher high though.

    I’m still in cash.

  11. Bill

    Also, on the $USD, on the weekly chart, it looks like the key breakdown point is 78.10 (using StockCharts). So to me, the dollar is still alive, but going sideways, just like the Euro.

  12. Bill

    One more small observation, ’cause I think many may be long GDX. On the 60 min chart, since last week’s Thurs, the GDX has made lower highs and today a new lower low. GLD and SLV also made lower lows today. Just a micro observation.

  13. Bill

    ONE MORE COMMENT πŸ˜‰

    This one, a Rant and a Rave. πŸ˜‰

    Time to WAKE UP, people! The HUI is DEAD. Look at a weekly or monthly chart since 2000, and you can see it’s totally hosed. Meanwhile, gold and silver bullion have risen. The trade is bullion, not stocks.

    Besides the whacky daily chart of HUI this past year, what really stood out to me was ABX’s and GG’s earnings. Gold “in the ground” ain’t worth squat. Remember, 1 bird in hand is worth more than 2 in the bush? Apply to HUI.

    What we hope and wish and dream means NOTHING.

    We have to face the FACT, that gold and silver bullion are going up, and HUI is HOSED. Any time we believe something or develop an opinion, that differs from fact, we’ll get re-educated.

    1. Gary

      Funny, I heard the same thing about silver in the summer of 2010. This is how major bottoms are formed when everybody thinks like you do that because something hasn’t gone up in the past it can’t go out in the future.

      Haven’t we figured out by now that the past is not predictive of the future. If you don’t break that habit you will end up sitting on the sidelines while traders who understand extreme undervaluation and severe downside momentum created by irrational human emotions are positioning to take advantage of one of the greatest opportunities of the last decade.

    2. Tiho

      If you own miners, you might be so glad to hear things that Bill wrote. Throwing in the towel is a major bottoming signal…

    1. Danno

      I don’t think Gary is avoiding you. Yes, the HUI could rally for a few weeks then rollover. Gay does reevaluate constantly. You have to. I’m guessing he will detect a sea change when the time comes.

  14. Veronica

    9 day deferred moving average is now giving gold support as it dipped underneath today but closed above.It dips down into a low next week and moves up thereafter and hopefully will continue to support on a closing basis.

    1. Bill

      Gold sure looks a lot more bullish to me than silver or GDX. It’s been so hard to wait out this correction. I sure GLD starts going up.

  15. [email protected]

    “Haven’t we figured out by now that the past is not predictive of the future” – Gary Savage

    Gary this statement is just plain wrong. W.D. Gann would tell you the same thing infact he said

    “By Studying the Past, We Can Predict the Future” – WD Gann

    So who do we believe WD Gann or Gary Savage?

  16. saif

    The dollar is setting up for the most amazing rally. Every currency other than CAD has already topped for the year against the USD. I am long some ABX as I think it is too cheap here though.

  17. Blog Posts - RNM

    As a currency trader I too see that the U.S buck certainly cant be counted out just quite yet.

    The majority of charts/others vs u.s.d (especially looking longer term weeklies)suggest sideways/down at best. With RBA cutting rates now as well..and EU looking to offer “unlimited liquidity”…perhaps things do continue sideways til late June but frankly…I dont expect fireworks.

    As well tracking good ol COPPER…….JJC FCX $copper etc…….all clearly already showing their hands with backtests of 200 sma s etc……NO?

  18. Blog Posts - RNM

    Another reasonable point…..Ive always learned to draw trendlines / levels of support with a crayon not a laser beam.

    Looking at weeklies…..$usd still looks like broad /strong upward trend still very much in play….as many commod charts can’t boast the same.

    This market is a meatgrinder now – and is clearly poised to confuse and confound as many as it can here at this interm topping process.

  19. Liquid Motion

    Gary,
    WOW…….you give up on taking a 15% rally on GOLD in this world of marginalised returns ???
    I’ve noticed over the medium term you state on this blog, in no uncertain terms, that your returns have performed at a level which by all accounts is very commendable (circa 20%). Doesnt therefore a 15% return on a 2 month timeline equate to 90% annualised ??
    AND then you conversely pursue the 30-45% riskier move in the miners in the ST and a larger expected 170% move over the medium term.
    Unfortunately miners are where they are because they haven’t delivered on promises.
    Bearishness is not unfounded. ITS REALITY. The market works.
    Some unfortunately have been caught up in the same mindset and treated unfairly (because indeed they have delivered and continue to do so). The majority however stink.
    ETF’s not the solution either …MF Global ring any bells….!!!
    IMHO…heavier weighting in physical than in miners…but you gotta do your homework.
    BTW…this bottoming in GOLD as you call it (and I agree with)….will be the low for this last leg of this secular bull….dont buy physical for the “trade”…it has become MONEY in the real sense……buy it to protect your wealth and purchasing power. Interested buyers are raising their entry points and support levels are rising. Physical will win the WAR over paper and will allow you to purchase what will become cheap in the future.

    1. Straight Shooter

      Mr. “Motion” –

      “Unfortunately miners are where they are because they haven’t delivered on promises.”

      While I believe the main purpose of your post is only to ridicule Gary, I can’t help but comment on the foolishness of your claim here.

      It is fair to say that right now, a large number, if not a majority of the miners are trading well below book value, and many of them also have extremely solid production increase forecasts due to a high concentration on developing new reserves with the rapid rise in PM prices in the last ten years.

      So if the miners “haven’t delivered on promises,” it is ONLY in the sense that they have been oversold in terms of sentiment – i.e. investors have left them from an emotional, rather than a rational, standpoint. Typically, if one buys oversold stocks at this value, sooner-or-later, people take notice and the price starts to rise as the emotional investors return to get on the bandwagon – particularly when the metals they produce rise in value – this is exactly what happened to silver last spring. Folks like Gary helped me make a ton of money on the way up, and also helped me to sell close to the top and then make money selling short on the way down (yeah,I know that isn’t Gary’s thing).

      I would add that it is easy to ridicule, but Gary is the one who sticks his neck out and creates this blog and has the courage of his convictions to post here based on reasonably good research and application of sound wave theory. No one has a crystal ball, and no one is ever 100% correct when it comes to the markets. But Gary does a good job and provides a lot of information for free here. I, for one, appreciate his insight even if it only makes me think – but I also happen to believe he is correct more often than not.

      So you and some others here might want to consider giving the guy a little slack.

  20. Liquid Motion

    SS,
    Believe what you will …to justify your post.
    Mine was not to say as you suggest, but to put my analysis of the subtleties of Gary’s points.

    If sentiment is so poor and miners are oversold…they are there for a reason(s). Charts are confirming that…….DUH..!!! I am not hypothicating about why that is the case…other than a lack of performance. Other factors no doubt are at play (in determining price levels) other than so called market knowledge, but I am not professing to be a teacher in this regard for those too lazy to accept MSM BS. As far as Mark Twain’s quote relating history and rythym of markets goes, it may not necessarily be appropriate this time around on a sector basis.

    Lets face facts….if they (miners) are sooooo oversold right now….why arent MM, Hedge Funds, Sovereigns & Retail Investors jumping all over them. Ahhhhhhhh…but perhaps they are….but not in the way that you or others may perceive or wish for. This market (including investors and traders)is, to a large extent, already aware of where the miners are. It is for those who choose to invest in them because of perceived value, to determine why they present as such. It may be true that sentiment and bearishness is analagous to a “buying opportunity” …but equally they can present as a trap.

    IN this world of paper value and un-trusting PTB, where does value lie ?
    Is it in the psychology of the participants or the ones that actually control it (the market)? This market is not working of its own free will. Everything about stinks to high heaven.

    For me value lies in miners in politically stable countries (free of distortion ..if that is possible)… and also with tangible/hard assets.

    I understand what this blog is about….and as much as it is a free service, it is open for honest and frank dialogue. I thank Gary for continuing to allow that.

  21. Liquid Motion

    SS,
    U cannot see past the nose on ur face. U also lack comprehension skills.
    Gary’s call (oversold and bearish sentiment in miners) is one of many that I have seen on the very same subject. Its indeed quite obvious…Too many people are making this call…and yet ????? Why isnt there a turnaround, a flood of money, a reversal of trend, exponential moves…if value is so prevalent???? Too many investors/traders gun shy ?? Preservation of capital could be a factor dont ya think. Where are the bottom feeders…the value predators the WB’s of this world??
    Its not about being contrarian or smarter (as u so eloquently put it). Q’s , reasoning and context are necessary in this market IMHO.
    BTW U are taking this far too seriously and personally to be a third party observer.
    You dont offer any pearls of wisdom , nor do you serve any purpose by posting here other than in ur own mind.

    I offer my comments as my own not to appease the mainstream or to attack Gary. If you read carefully I support what he has to say, with tempering and context.

    How about some of ur own wisdom. Perhaps you can offer a reasonable cause for the miners to be where they are & why they present as a turnaround…!!

  22. Gary

    One could have asked those same questions in Oct. 2008. Recency bias and fear of a draw down prevents most people from spotting great opportunities.

  23. Liquid Motion

    Gary, I wont argue the turnaround story, I’m simply saying that a) It may not be applicable to all miners (explorers) and of equalling magnitude, & b) History is wonderful for setting up charting stories for potential future moves….but it is no guarantee. Like the comment above…no one can predict with absolute certainty what the future holds. It would be nice to think that some miners could offer up 3x 4x or 5x gains over the next few based on bearish sentiment and dollar rally broken…but I for one aint holding my breath for it to eventuate given that miners are treated / suppressed in the same fashion as the price of the physical stuff they dig out of the ground. The world has changed over the last few years and so too has the psychology of the market and its participants. Great value in miners does exist …on paper…..recognition of that value will need to borne out through a trigger…..i)market reassessment or ii)an event changer that comes out of left field ( a currency crisis for eg.). In either case you will need to see a flood of money moving in the same direction over-powering the forces moving the other way. It could very well happen almost overnight….catching those not participating (or short) off guard. For now I wont use the history lesson to add to my already existing portfolio. I am cautious not of adding more but being selective about which ones….great opportunities indeed.

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