Monday, October 25, 2010

Market Overview - Part II: U.S. Dollar, Japanese Yen & Gold

(this is the second in a series of five posts concerning the markets)

I would like to start by featuring a couple of long-term charts of the U.S. Dollar.

U.S. Dollar weakness is a foremost concern of mine.  As such, I have extensively written about it.  I am very concerned that the actions being taken to "improve" our economic situation will dramatically weaken the Dollar.  Should the Dollar substantially decline from here, as I expect, the negative consequences will far outweigh any benefits.  The negative impact of a substantial Dollar decline can't be overstated, in my opinion.

First, a look at the monthly U.S. Dollar from 1983.  This clearly shows a long-term weakness, with the blue line showing technical support (until 2007) that has now turned into (technical) resistance:

charts courtesy of (click on images to enlarge charts):

Next, another chart, this one focused on the daily U.S. Dollar since 2000 on a LOG scale.  The red line represents both a trendline as well as a relatively good visual "best-fit" line.  The gray dotted line is the 200-day M.A. (moving average).  As seen on this chart, the U.S. Dollar looks vulnerable to continuing its downward trend that has been interrupted since early 2008:

Lastly, a chart of the Dollar on a weekly LOG scale.  There are some clearly marked  channels here, with a large, prominent triangle featured.  Triangles are thought of as "continuation" patterns.  In this case, it would be a continuation of the Dollar downtrend since 2002:


Next, onto the Japanese Yen.  Up until 2-3 years ago, it was widely believed and (commented upon) that a rising Yen was a sign of danger.   This belief seems to have diminished; however, the strength of the Yen has not.  Is the rising Yen still a signal of danger in the markets?  I believe that it is.

Here is the daily chart since 2005 as depicted on a LOG scale.  The 50-day M.A. is shown in blue.  As one can see, there has been a continued string of strong uptrends, and the Yen pricing action is increasingly "parabolic" in nature:


Lastly, a Gold chart.  I have written many posts about Gold.  Of course, the most common question that arises with regard to Gold is whether it is in a bubble, which I have discussed previously.  Certainly, the price action since 2001 would support such a claim.  However, there is much more that should be considered before one can conclude that Gold is in a bubble.

Here is a monthly chart since 1980, as depicted on a LOG scale.  It is interestingly to compare how Gold's rise has correlated with U.S. "reflationary" efforts over the last 10 years:

Now onto Part III, a look at the bond market and interest rates...
A Special Note concerning our economic situation is found here
SPX at 1183.08 as this post is written

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