How Can You Tell When Gold Is In a Bubble?

When the junior miners start showing these kinds of returns, you might be in a bubble.

We're nowhere near that point yet.

Foreign Holdings of US Dollar Assets

Roughly analagous to Eurodollars, although it is not clear how much if any of the central bank reserves are actually captured here in these reports by BIS reporting commercial banks, especially in China and the non-European countries. Certainly the NY Fed Custodial Accounts for Foreign Central Banks show no decline whatsoever from the long term trend of accumulation to support their mercantilism and currency pegs.



But the takeway from this chart is that a long term trend of dollar accumulation was broken, and rather painfully, in the deflating of the Wall Street financial assets fraud.

One might not expect the Europeans and Asians to accept new financial instruments in dollars quite so readily. The US seems intent on maintaining a few mega-banks to serve as "competitive" instruments of national policy on the world financial stage.

They may find that maintaining the banks and their particular weapons of financial mass destruction may be just as costly as 700 military bases in diverse locations. Such are the burdens of empire.

Long Term Weekly Gold Chart Targets 1275

Now that gold seems to have successfully broken out from its continuation pattern (ascending triangle or inverse H&S) we should be able to chart its targets more precisely than the chart from 24 September that at least successfully projected the breakout.

If there is a major liquidation event, such as an equity market dislocation, gold will likely be hit as well, but will provide an exceptional buying opportunity and would historically rebound more sharply than equities and most other investments.

As always, this is a forecast with some probablities of success, rather than a prediction.

Basically, the ascending triangle calls out 1275 and an inverse H&S targets 1300ish. A confirmed breakdown below 1000 deactivates the formations. We will know more about the first pullback when we see how far this current leg goes. It has moved much more quickly so far than most have imagined, but the short term trend is quite apparent on the chart.

US Dollar Very Long Term Chart

Here is an update of the US Dollar (DX) Very Long Term chart last shown on 3 April 2009 when the Eurodollar Squeeze was still abating.

We do not see any reason to change the longer term targets based on what appears to be a confirmation of the continuing decline.



The reasons for this decline are obvious, but so many miss this that we have to wonder what people are thinking. Despite the credit writedowns and even a potential unwinding of the dollar carry trade which we think is a bit overblown, as the demand for dollars in bank lending is slack, most analysts are missing the bigger picture of a huge overhang of eurodollars that are becoming increasingly less useful to foreign holders, especially if the power of the petrodollar declines.

There is a potential double bottom to be made at 71, with a possible target in the higher 80's based on the charts. The fundamental scenario we would see is a significant equity market dislocation and/or an exogenous geopolitical event that caused another artificial short term demand for dollars and the T bills. Currency dollars are, after all, sovereign debt of zero duration and in any panic there is a rush to the short end of the curve, to the point of accepting some negative rates of return for the safety of capital.

But after that event, the decline of the dollar will gain again in momentum lower unless there is a profound systemic reform and restructuring of the federal budget deficits. Even clever frauds can work only so many times, and there is nothing particularly clever or sophisticated about Wall Street's latest antics, excepting of course their size and their audacity which the average mind cannot well grasp.

India Puts Its Weight Behind US Dollar Alternatives

Here is an alternative index of the US dollar from the Federal Reserve that is much broader than the DX in its constituent components. It is a weighted average of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners.

Broad currency index includes the Euro Area, Canada, Japan, Mexico, China, United Kingdom, Taiwan, Korea, Singapore, Hong Kong, Malaysia, Brazil, Switzerland, Thailand, Philippines, Australia, Indonesia, India, Israel, Saudi Arabia, Russia, Sweden, Argentina, Venezuela, Chile and Colombia.

It shows the same Eurodollar squeeze and subsequent decline. As a point of order, the term eurodollar is a bit misleading from its historical roots. It basically refers to any US dollars being held in other than domestic banks, and not just in Europe. The TWEXB is not the same timeframe as the DX because it is a more recent construct.