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Metals & Currency Review: Let's Talk US Dollar Rally

James Sinclair, Jan 31/03

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There is no question that the U.S. dollar is significantly oversold. From
that type of a technical situation a rally is always possible. But the
question is not if we are going to have a technical bounce but can the U.S.
dollar reverse its downtrend from this point.

In order to get a feeling for this issue, we need to access both the
technical as well as the fundamental condition of the U.S. currency, the
common stock of the U.S.A. Inc. Let's elect Kenny Adams to come front and
center now for his view on the USDX:

Q: Kenny, what do you see for the USDX from here?

A: Jim, the USDX has entered into significant long-term support between
.985 and 1.00. This type of support can produce rally action. Below this
level, more long-term support exists in a tighter range of .9575 to .9525.
The maximum downside I can see to this leg of the dollar bear market is
.90. That is not to contradict your views, Jim that the dollar could even
go lower but to say in this leg, I do not see it.

Kenny, by reviewing the action of the dollar during the gold bear market we
have three distinct periods of that bull market. One thing is clear and
that is when the dollar turns direction, like interest rates, the trend is
long. Taking past history as our guide and averaging the percentage moves
made by the dollar against major international currencies, you will see
that my target of a minimum of 1.20 to a maximum of 1.25 on the Euro is
quite possible. In terms of time then, I suspect that the dollar will be in
a bear phase well into, if not all of, 2004. History suggests that when the
dollar assumes a direction, the average period of time for that trend is
seven years.

Fundamentally, I relate the dollar's present woes primarily to the current
account deficit. You may recall that I stated the fact that at a point when
a current account deficit reaches the 5% level equated to GDP the currency
of an industrialized nation, it will witness significant market adjustment.

A recent report in the Financial Times discussed the general assumption
that the U.S. current account deficit will reach $500 billion in 2002. That
figure means that the U.S. must attract $1.9 billion of foreign investment
every trading day. Estimates of the U.S. current account deficit for 2003
are now $600 billion.

The report pointed out that the Federal Reserve Board estimates that it
will take a 10% fall in the dollar trade weighted to produce a reduction in
the U.S. current account deficit of 1%. So to bring the U.S. current
account deficit back to a manageable deficit of 3%, the U.S. dollar would
have to fall to the maximum downside object that Kenny Adams points out of
.90 on the USDX. That is if everything proceeds along without a hitch.

So there it is. Anyone that buys the U.S. dollar here takes a flyer on a
technical oversold condition lacking fundamental support. I would prefer to
sell the rally than buy the dip. But that is bear market strategy in the
first place.

Gold:

The Battle is on again, first at $305, then at $330, then at $354.50 and
now at $372. In the near corner in the blue trunks we have the gold
dealers and in the far corner in gold trunks we have the Asian/Islamic gold
buyers. The gold community is cheering and moaning but something strange
has happened. The community members seem to have gloves on and are changing
into gold trucks. Those in the gold trunks are the members that have
ordered their gold share certificates to be delivered to them. Yes, a few
in the community have gold bars in their hands. To those who have taken
delivery of Comex futures as bullion, I say "well done." The blue trunk
fighters are looking weary and concerned. Their managers are arranging more
towels than usual near their corners and are practicing throwing towels.
One of the blue trunk fighters just tried to run away. Something must be
wrong in the Cartel corner.

There is no question in my mind that $372 is going to be eclipsed just the
way the prior "Custer's Last Stand" didn't stand too long. Let's do a
little arithmetic. The dollar must fall at least 10.5 % from today's high.
Gold has risen from 248 to 372 on a 20% drop in the U.S. dollar. That means
that a 20% adjustment of the currency impacted gold 124 points. Therefore,
another full 10% adjustment, assuming all other items remain even, should
affect gold to the tune of $62. With gold at $372, we could therefore
expect a further adjustment to $434.

Well, that certainly makes $372 look cheap. Of course you realize that this
calculation assumes no war with Iraq as such an event, short, medium or
long, might have a significant effect on the U.S. current account deficit.
Then there is the rebuilding of Iraq that is not factored in and an assumed
economic recovery in 2004 that might not occur. Well, that makes $434 look
cheap too.

Conclusion: A close of gold above $371.50 now will take gold over $400
quite quickly. Yes, I believe that is exactly what is about to occur.

Accompanying Charts (click to view)
http://www.jsmineset.com/i/misc/tnx-chairmancorner-jan312003-chart1.gif

http://www.jsmineset.com/i/misc/tnx-chairmancorner-jan312003-chart2.gif

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