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Which Way for Gold and the Dollar?

06/10/2009 1:00 pm EST


Mark Leibovit

Chief Market Strategist,

Mark Leibovit, chief market strategist of, says gold and the dollar may reverse direction for a while, but their long-term fate is clear.

Gold is still close to its recent high of $1,007.20 an ounce from February 20th and the all time high of $1,037 from March 17, 2008. Silver just a few days ago hit its highest level since August 2008 ($16.280 and rallied about 80% from its November/December 2008 low to the recent high.

Recent history suggests we should expect weakness into the summer and with the current short-term technical pattern turning negative, we will likely see further weakness.

Overall, I believe surprises are to the up side and we could be looking at 12 to 18 months of explosive upside action ahead. Bearish sentiment, let's call it disbelief, still runs high for gold. The fact the gold shares have been leading the metal higher is a very bullish sign.

My intermediate target for gold is $1,200, and my big picture target (possibly within the next two years) is for $3,000. We could go even higher, but if we think in terms of a 20-year up cycle—i.e., into 2020—there is plenty of time to see this unfold. My view is that $1,000 will become the new floor for gold just as $1,000 became the new floor for the Dow Jones Industrial Average when it broke through to the up side back in 1982.

The contrary view here holds that deflationary forces will overpower inflationary forces and Gold will first decline. That may be true, but the lessons of the 1930s show that gold-mining shares may show extraordinary gains in such a period. For example, between 1930 and 1935, Homestake Mining rallied from $80 to $495 per share in a deflationary environment.

The answer, folks, is to hold both physical gold and gold mining shares to get the best of both worlds, i.e., do well in a deflationary environment and an inflationary environment.

We hold gold as a safe-haven asset, a portfolio diversifier, to protest against inflation and deflation, and, most importantly, to protect against the debasement of our currency and all currencies (fiat money) will lead to their demise. This is why you own gold.

Meanwhile, previous Volume Reversal (tm) projections pointed to the US Dollar index  [hitting] 77, with a possibility of seeing 75. [We’ve already hit] a low of 78.426, which was its lowest level since December 18th, when it hit 77.688.

If we break through that support, we have support at 75.89 and then at the big low of 70.698 from March 18, 2008. Ultimately, the US dollar could be trading 50% below current levels! However, a short-term up trend has begun. Can the US Dollar index make it to the 83 level? That would be the first important resistance level.

Bottom line: A technical rally is now apparently under way. If the US Dollar index can clear the 83-84 level, that would be a formidable statement. Unfortunately, for stock market bulls, it would likely be the kiss of death and gold bulls, like myself, may have to temporarily go into hiding.

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