Looking at the long-term chart of gold bullion and the U.S. dollar, there is an interesting technical chart pattern developing that may help us predict the next move in the greenback and the yellow metal.
In the chart below, the red line represents the U.S. dollar index and the golden line represents gold bullion prices.
Chart courtesy of www.StockCharts.com
Both the U.S. dollar and gold bullion are going through the formation of the technical chart pattern called the “symmetrical triangle.” This pattern occurs during a trend and is often the result of a consolidation in prices. The majority of instances when the symmetrical triangle pattern emerges eventually result in a continuation of the prior trend.
If you observe closely, the trading ranges in the dollar and gold bullion have been getting smaller since the beginning of 2011. While keeping with their respective trends, they appear to be consolidating. The U.S. dollar has declined, compared to other major currencies. Meanwhile, gold bullion prices have been trending higher—from below $300.00 an ounce to close to $1,600 an ounce.
As I have been harping on about in these pages, the demand for gold bullion is robust, to say the very least. Central banks are rushing toward gold, seeking safety—they have turned into net buyers of the yellow shiny metal. In the last quarter of 2012, they bought the most gold in almost 50 years.
In contrast, by buying gold bullion, central banks may be losing trust in the U.S. dollar. According to a report by the World Gold Council (WGC), in 2000, central banks held 62% of their assets (or reserves) in U.S. dollars. By 2012, that percentage of U.S. dollar holdings decreased to 54% of the reserves. (Source: Market Watch, March 13, 2013.)
It isn’t a hidden fact anymore: the Federal Reserve has been increasing the money supply, as its balance sheet has grown to more than $3.0 trillion and its paper money printing program continues at a rate of $85.0 billion a month. The more paper money the Fed prints, the more vulnerable the greenback becomes.
Time will be the better judge of where the greenback and gold bullion end up, but from the looks of the chart above, the U.S. dollar appears bearish and gold bullion’s future seems bright.
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What He Said:
“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I’ve written over the past three years how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S. peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming? No. How about a severe deflationary recession? Yes!” Michael Lombardi in Profit Confidential, January 21, 2008. Michael started talking about and predicting the economic catastrophe we began experiencing in 2008, long before anyone else.