Gold Will Still Rule

06/11/2008 12:00 am EST

Focus: MARKETS

Curtis Hesler

Editor, Professional Timing Service

Curtis Hesler, editor of Professional Timing Service, says the dollar will continue to fall and despite some corrections gold will move higher for a long time.

The value of the US dollar has continually eroded since 1913 when the Federal Reserve was formed, and it will keep on depreciating over the long term. The trick is to find which asset class—tangibles or financials—will give you the advantage at any given time versus holding dollars and suffering this erosion. Simply being in the correct asset class will account for 85% of your investment success.

Knowing which asset class to be in is amazingly easy if you monitor the ratio between the ultimate representation of financial assets, the Dow Jones Industrial Average, and the quintessential real asset, gold. The ratio topped out in 2000, well over 40. It has since fallen to about 14. During this time, tangible assets—commodities—and those stocks advantaged by rising commodity prices have outperformed ordinary stocks and bonds by a huge margin. This will continue to be the case until the ratio falls under five.

After falling significantly during 2007, the US dollar, as represented by the US Dollar Index, stalled out during December-February between 76.00 and 78.00. It then took a steep drop to 71.50 when the current trading range (between 71.50 and 74.00) began. Frankly, I don’t expect anything but a continuance of the trading range until August when the next down leg is due to begin.

This dollar trading range has been accompanied by a general correction in the commodity sector, including gold. This is as it should be. It is important for you to understand that this is only a correction in an ongoing bull market—like that earlier this year when the dollar decline stalled out. We are beginning to hear all sorts of bearish commodity talk from the media, as you always do when prices correct. This commodity bull is not a “bubble.” It will become a “bubble” eventually, but not for some time yet—not until the Dow/gold ratio falls under 5.

Gold has been pulling back after running over $1,000 an ounce in March. This is in line with seasonal tendencies and the recent trading range in the dollar. This correction is a normal occurrence in an ongoing bull market. We will see more rallies and corrections along the path of this bull. Corrections are buying opportunities.

We likely have a little more time in this gold correction before the next bull move begins, but prices look close to making lows soon. I have been forecasting $840-$825 in gold for some time, and we have seen prices as low as $850. I do believe the $850 level will be challenged, and this will trip sell stops just under that level. The result will be a final washout, taking prices into support at $840-$825.

As we see additional weakness in gold toward our downside expectations, [this has signaled] buying opportunities this has signaled in the past.

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