Dear CIGAs,

In order to understand the upcoming violence in the US dollar price you need to study and consider the following.

I am going to present this as simplified as possible as it is an area not commented upon by most gold analysts, probably because they haven’t a clue.

It is vital that it is grasped, as the US dollar is gold’s key influence. In time it could be the other way around, but we will focus on that seeming contradiction only when it is relevant.

First lets dismiss some popular opinions now being spewed amongst the community.

1. The dollar market is inhabited by mostly shorts and therefore is ready for a substantial rally.

Those shorts that you can read from COT (Commitment of Traders) represent a very small portion of global dollar investors. That renders COT figures interesting, but not necessarily indicative.

The clear majority of those shorts are positions that have been assumed by the CARRY TRADE. This will be the thrust of this missive so pleasekeep this fact in your mind.

2. Some Elliott Wave commentary is suggesting a big dollar rally from here. I think that I am again facing questions raised by the Prechter Dollar/Gold flyer that always goes out when any reaction in gold is possible favoring the dollar and panning gold. Regardless, wave counting is a highly SUBJECTIVE ART. I will stay with Alf Fields when it comes to this discipline.

The Carry Trade:

For many years the Yen was the currency of choice for the carry trade. Interest rate charges for Yen borrowing were the lowest for a major currency in the world and as a currency it was weak on balance.

Now the US dollar has replaced the Yen in both categories.

The carry trade will seek to borrow in the weakest currency and short that currency in order to protect against depreciation of the financing item. The carry trade seeks its profit in the utilization of the borrowed currency for higher returns.

The majority of today’s carry trade now does not seek the overt risk inherent in playing both sides of their currency exposure position. What they are inherently long by borrowing the dollar is the dollar and therefore the short thereof.

The currency market is anticipating long-term economic lethargy in the USA versus economic strength in Asia and firm world commodities including gold.

Examining the history of the Yen during its period as currency of choice for the carry trade will show you the violence that occurred there even though the Japanese Central Bank tried time and time again to defuse this activity.

Because I hold the firm opinion since the 121 long-term USDX top that I pointed out on JSMineset, I remain of the mind that the dollar will trade below .6200.

I do not see the shorts in the carry trade dollar being run out of their highly professional shorts any more than they were in the Yen for years.

Yes, the US dollar will experience short violent upside rallies because of the carry trade newcomers, but they will be very SHORT TERM.

The carry trade influence, at a time when there is a universal desire for diversification out of the dollar into an SSGI, minerals, energy or anything, is quite bearish long term.

I must admit for the investors seeking insurance against the fundamental economic and financial deterioration, not at all now healed, trading in such markets seems like total madness.

Take your position without margin, as Armstrong and Alf are totally correct.

Stop being caught up in the drama.
Stop being caught up in free junk mail you get on Elliott Wave.
Stop being manipulated by MOPE.

Relax knowing you have done the right thing, and that no margin person is going to come calling at just the wrong time.

Regards,
Jim