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As many of
you already know I expected the dollar index to put in a major three year
cycle low sometime this year. The normal timing band would have been for a
bottom in the spring. The recent breakout and move to new highs has confirmed
that the May bottom did in fact mark the three year cycle low. As expected
that also marked the top of the cyclical bull market in stocks.
 
It's widely expected that the Fed
will announce operation Twist at today's FOMC meeting. Obviously if printing
several trillion dollars didn't save the economy, then rotating the Fed's
balance sheet from short-term interest rates to long-term in the attempt to
hold down the long end of the yield curve isn't going to have any effect at
all as the approaching recession intensifies. Interest rates are already at
historic lows.
Interest rates aren't the reason why
people are not borrowing.With continued high
unemployment There simply isn't enough demand for businesses to expand their operations.
The American consumer is so deeply in debt that he can't service it.
Unfortunately, we can't print money like the US government so it doesn't help
us to go deeper into debt. The US consumer will not be borrowing money any
time soon.
The bottom line is operation twist
will be a miserable failure just like QE1 and QE2.
The stock market, and gold are now
moving into the timing band for the next daily cycle low (selling event). The
only question now is whether the announcement of operation Twist this
afternoon will initiate a short term knee-jerk reaction higher, or whether
the market will immediately continue to sell off into that next cycle low
that is due to bottom sometime in the next 11 days.
I expect gold to bottom a little
sooner as its daily cycle tends to be slightly shorter.
But gold also is at a critical stage.
It must hold above the prior daily cycle low of $1705. If it fails to do that
it will signal that an intermediate degree decline has begun. It would also
signal a left translated intermediate cycle which would have high odds of
moving below the prior intermediate degree bottom of $1478.
As you can see in the chart below
gold began to struggle just as soon as the aggressive stage of the dollar
rally began.
As the stock market moves down into
the next daily cycle low and the selling pressure intensifies, this should
drive the dollar index much higher. It remains to be seen if gold can reverse
this pattern of weakness in the face of dollar strength, especially since the
dollar will almost certainly be rallying violently during the intense selling
pressure that is coming in the stock market.
All we can do now is wait to see what
the initial reaction to operation Twist will be this afternoon. Will there be
a temporary knee-jerk rally that quickly fails, or will the market just
continue down after yesterdays
reversal?
Toby Connor
Gold Scents
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