US Dollar and Gold Forecast for 2011 – Did they get it right?

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We know the US dollar in 2011 turned pretty well in early May, although it was not as impulsive as we had projected coming off the lows. It seemed to be playing out fine with higher lows and higher highs so far, as it progressed into the second week in July 2011. But the Tuesday’s (12th July) reversal away from resistance has been harder than expected, specifically as we had forecast the change in US Dollar trend has turned from down to up. Maybe something else is going on?

The problem with this week’s action is the resistance from the lower line of the US Dollar Index chart and continues to hold. It really needs to get back above that line, which is now in the vicinity of 76.70 (and rising) to show evidence that the trend is truly changing. If it can’t, and at this point it seems it cannot, then the US Dollar Index still has the potential to not only test 71.33 again but even to break it. The potential is for it to test 68 – 70, which would put it into a “spring” (down spike flushing out the bulls and then a sudden reversal to the dollar trend pushing it higher) position against the 2008 low.

The stalemate in Washington over the US Debt and budget is one obvious potential catalyst for a US dollar collapse. It hardly needs to be said that the failure to reach agreement is a serious problem, because it places doubt in the mind of debt buyers whether the full good faith and credit of the USA is really what they thought it was. Confidence was already injured with the US Dollar drop of 2010-2011, if this impasse goes much further it could be permanently damaged – and confidence is everything in a fiat world.

Therefore, I would not want anyone to place all their eggs in one basket here. Keep an open mind. I would forecast that in this environment a lower US Dollar would lead to the last rally in precious metals and some commodities for a while. And for a lower stock market. So far, evidence is growing that a bull trap is being built for stocks in 2011.

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Gold forecast 2011: Central banks withdrew about 632 metric tons of gold from deposits at the Bank for International Settlements in the year ended March 31, the most in at least eight years. Gold deposits at the BIS fell to about 729 tons, from 1,360 tons the previous year, according to its annual report. Which begs the question – if CB’s are so enamored of paper money and so dismissive of gold bullion, why are they stockpiling gold? We all know the answer to that one.

Gold tested the lower band and has had a big rally since last week; it’s now back up to important resistance. If it is short-term bullish it should leap to new highs; but if it gets rejected by 1557 resistance, or has a false breakout and reversal, that will spark a short-term sell signal. The possibility which must be considered, is that we have seen a top in commodities that may last another 12 to 18 months. I am staying cautious about the outlook until I can get more conviction.

Trading Gold using a Mechanical system: One model suggests gold will tag along with a summer rebound attempt in silver, so let’s watch for that. Once the summer 2011 rebound is over though, I am looking for gold to correct back to test its support at 1425.

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