Falling Dollar Could Create New Gold Rush

12/04/2008 10:17 am EST

Focus: FOREX

John Jagerson

Co-Founder and Contributor, LearningMarkets.com

UN economists are forecasting a very hard decline for the US dollar in 2009 today. Considering that the USD rally has been extremely fast in 2008, and mostly concentrated in the last two quarters, a correction to the downside might not be too unexpected. The economists point to increasing federal indebtedness, overbought bonds, and bottoming-out yields as evidence that the risk in the USD in 2009 is biased to the downside.

If the USD starts to lose value, there are many ripple effects, including higher gold prices. The price per ounce of gold in USD terms increases when the USD loses value versus other currencies. The reverse is also true, and gold bugs have been beaten up considerably as the USD has appreciated over the last several months. 

One of the ways traders can take advantage of a decline in the dollar is by buying gold or gold ETFs, like GLD, or through gold industry stocks. Gold stocks may actually be more productive than gold's price itself, as the expected move is likely to be larger on a percentage basis. Higher gold prices will likely increase margins and create growth among the major gold producing companies. There are several gold companies or ETFs (representing groups of those companies) for an eager buyer to choose from. The chart below shows an example of a gold stock ETF—Market Vectors Gold Miners Index (GDX)—based on the gold miner index calculated by the PHLX.


There are two things I would point out in the chart above:

First, today gold prices improved by 1.85%, while the gold miner index amplified that increase in price by increasing 9%. The gold miner index has improved in value by 35% since the recent gold rally started on November 24th. During the same period, gold prices have improved about 5%. The difference is obvious, and for investors confident that the USD is likely to correct to the downside, the opportunity seems attractive.

Second, from a technical perspective, the gold miner index is sitting at an interesting support level. Although the longer-term trend is negative, the rally from a double bottom in October/November is still intact and prices are sitting at the support level of the midpoint between the two bottoms. A technician would be looking for the low $30's in the near term as a profit target.

Longer-term traders convinced to take advantage of the UN economist's predictions for next year may look at the gold miner index (GDX) as a great way to speculate on& a falling dollar, rising gold prices, and growth in the gold production business sector. As I mentioned above, small moves could make this a very productive investment.

By John Jagerson, of PFXGlobal.com and LearningMarkets.com.

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