12/16/07 - DIRECTION CHANGE!! CORRECTION COMING!

Well, we have a strong correction change of direction. These are my thoughts, and I reserve the right to change my mind when the market changes and new direction is needed. I am married to my wife, not the market. If the trend says you are wrong, fighting it is a high speed way to loose money. I learned that very expensive lesson long ago. Do not fight the trend - the trend is always right. I am still very bullish for the long run, just thinking that we may be facing a short but sharp correction in both gold and the Dow in the next couple weeks, due to a sharp and large bear market reversal rally in the dollar.

We have reached a point in this gold market where we have to go somewhere, either upward to a possible blow off top, or downward to a more serious correction. We cannot remain here where we are, balanced on a knife edge at $800. I've been looking at historic charts tonight, and I am coming up with some very ominous conclusions. It feels like I'm the captain of the Titanic and we just broke through an opening in the fog to see a gigantic iceberg dead ahead. A couple days ago, I sold my positions and I am currently in 100% cash as I did not like this last weeks trend action. If Monday plays out as I expect (as in more of the same of what we saw Friday 12/14/07), I am selling short and possibly buying puts on gold miners. My fear: That the dollar could do exactly what no one in his right mind believes is possible: A gigantic short squeeze - basically the inverse of a blow off top. Right now there are no dollar bulls - someone who is bullish on the dollar is considered to be not in their right mind.

To the right here is a chart that depicts a major bearish reversal / extreme short squeeze that happened with gold in September of 1999. The similarities are scary. Let me compare this with gold a while back. In 1999, gold had been on a 19 year bear market. Governments had been dumping gold on the market in a big way for years. Mining companies sold forward their projected production 5 and 10 years ahead - it was the only way they could get decent prices for their gold. Gold was considered a bad asset as it produced no income, and it cost money to store and keep secure. The only reasonable thing to do with gold was to sell it for whatever you could get. It was easy to make money with gold - just sell gold short as it was always going to go down - forever. People who were bullish on gold back then were considered as simply crazy - out of their minds. Gold had gone down for years and was hitting lows it had not seen in decades. I remember reading predictions back then, from experts at the time who predicted that in the future (like now) gold would be selling for less than $100 per ounce. Gold as an investment was an archaic left over from the dark ages - it had no purpose other than jewelry. That's the mindset that gave birth to the 1999 major bear market reversal in gold.

The dollar market now looks very similar - as investors all over the world know the dollar stinks and is going down and will continue down for a long while to come. People have been shorting it for years and making easy, safe, reliable money. The mindset now is "If you own dollar assets, best thing you can do is sell and get out of them." Internationally, countries who base their products or currencies on dollar pegs are looking to get out of their dollar standards. I haven't talked to anyone who is bullish on the dollar in ages - the few folks who are dollar bulls are considered as just plain old nuts - out of their minds. The dollar market has crashed decisively through multi decade supports to new lows. Gold bugs are asking what the value of gold will be when the dollar hits zero. Every forex investor on the planet knows that the dollar is headed down. Just bet against the dollar and you will make easy money. Its been that way for years - easy, safe, reliable profits. So its not just yanks betting against the dollar, its Europeans, Asians, everyone. The dollar market of 2007 feels exactly like the gold market did in 1999.

Now to the right here is our current dollar chart. Its that dang parabolic launch at the end that has me so worried. Its the tip of the iceberg - 90% of which we cannot see yet. Compare this with the Gold bear reversal chart above.

How it works is that during the "good" times, everyone loads up on the short side, and there are just way too many folks short with weak margin positions. The first leg up just looks like another minor counter direction move that everyone has learned there is no need to fear. However, it goes a little farther than normal and forces some margin calls on some weak handed players. They are forced to buy in and that moves the market upward. This takes out more weak investors who are over margined (but perhaps not as bad as the first group). The are also forced into the market to buy and this moves he market up even more. The process continues and grows, snowballing until investors who were short but holding good strong positions loose so much money that they are forced to buy as well. The effect grows until the market spikes upward to crazy, irrational levels. The whole thing happens quickly over a period of days. If this happens, we will see a day with a movement of 5 points or more on the dollar in the next couple weeks, and gold will likely move down 50 bucks or so that day. Our problem is that to being long gold is effectively being short the dollar.

Not god news, but that's where I think we are headed in the next couple weeks. Another item of bad news is that it probably will take most of a year to work off this condition. Take a look at gold for the year after the 1999 reversal. The worst will come off quickly, but the rest will take a while.

The Dow and other averages are not doing all that well, are very volatile and coming to the conclusion that we are likely entering a recession in 2008. Many of the large multi-national companies that have done fairly well in the major indexes have made good money with the cheap dollar - their goods are priced well overseas and when they exchange money to bring their profits back to the US as dollars, they make money on the foreign exchange as well.

If the buck picks up strength for a time (we all know this wont last forever if it does happen) it will cut into multi national profits, probably knocking the DOW down 1000 points or more. This scary chart to the right seems to indicate the DOW is forming a nice head and shoulders pattern, just in time perhaps to take a big dump downward courtesy of the dollar and possible coming recession. Dow 12,000 might be a reasonable target.

The fundamentals of the dollar have not changed. It still stinks, and its long term future is still down. All that has happened is that the markets have become horribly imbalanced, and so I believe we are going to have a very strong rebound rally in the dollar. I am also still very bullish on gold for the long run. However, even in a very strong bull market, there are counter directional movements where gold goes down temporarily. Many of those moves are insignificant, but some are larger. I try to avoid some of those larger ones.

My plan is that I will wait to see what happens Monday 12/17/2007. My actions will determined by what the market says.

If we get another big bullish dollar move up to 78 or higher (we are at about 77.4 now), together with a drop of 5 to $10 in gold and a likely drop in the Dow exceeding $100, then I am turning bearish for the next couple weeks or until the trend dictates that I do otherwise. If that happens, we will likely be starting a serious dollar correction that will need to play itself out.

If the dollar is flat to down, and gold is flat to up, then I will do nothing, but just keep my eyes open and watch. If this happens I will probably be wrong in my assessment about the dollar correction and I wont be making any serious commitments.

This is a very fluid and changing market - I will try to post more comments as the events unfold.

Chris
12/16/2007