us dollar reaches point of no return

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    The dollar situation has reached a point of no return. The only strength we witnessed today was a small amount of short covering and US Treasury stabilization via the ESF. A close below the .9352 support level now changes support into resistance.

    China’s foreign exchange reserves are four times that held by the United States. Most of these paper assets are in dollar- denominated instruments. As such, China has become the financier of the United States.

    However, let’s not leave out its Asian neighbors. The total Asian stock of foreign exchange reserves- another title for US dollar denominated debt - is USD $1,670 billion of which China accounts for $364.7 billion.

    That being the case, Asia holds approximately 18 times the amount of US dollar-denominated paper assets as compared to the holdings of the USA Inc.

    This gives rise to the logical question of when ecactly “enough is enough.” My answer to that is simple. It has already happened and that is reflected by the large bearish Head & Shoulders formation in the USDX which is caused mainly by hedging operations against the Asian hoard of US debt instruments.

    The break of the neckline on the chart below .9247 with a two day follow through on the downside is my answer to the question about when enough is enough.

    You simply cannot hedge more than 10% to 15% of the US debt held by the Asians before the hedging operations break the market well below the neckline. And that’s even if they were geniuses and started above 120 as measured by the USDX.

    So all this gold drama is nothing more than that - market drama. It will end soon as will the recognition that $400 is no barrier to gold. A new high close on the December contract above $387.50 and there will be no serious resistance until $419 as measured by the December contract.

    Gold shares - being so deftly liquidated as gold nears the $400 level - will go into SHOCK when gold not only closes above $400 but takes on $419 and $433.

    The last time gold closed over $400, it never looked back until it reached $887.50. Who knows what might happen under present circumstances. Personally, I am quite comfortable with my core position and Canadian dollars.

    The Comex floor talk is that $400 is nothing significant. A close on the December future of $388.50 or above takes out the old high of the December contract that was an established intra-day high of $387.50 on February 5th, 2003 and the most recent high close of $388.40. This leaves nothing to challenge gold before $419.00 in terms of the December delivery month.

    We would have established that today if it was not for the trading crowd being on the long side on the floor near the close when the Exchange Stabilization Fund did some dollar stabilizing.

    The US dollar was up-ticking somewhat as the Comex close approached. That caused the trading crowd to even up their long positions as the Comex close approached. Let’s see what tomorrow brings.
    Tonight, tomorrow or the next day, it doesn’t really matter. It will happen and $400 will be behind us. The share crowd will be running after all the stocks they sold to replenish their positions.

    I would not be surprised to see the gold shares start outperforming gold itself as we go post $400.


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