It hasn't been the best of days for the gold bug community (of which I am proud to be a member). While we did open 2012 at $1564 -- and thus are up around 4% year-to-date -- the fear still persists, with rumors that the September 5, 2011 high of $1,920 is a top that will not be revisited for some time, if at all. The PDAC show revealed that our own industry was concerned about fundraising for future mining operations. Mainstream journalists like Joe Weisenthal are making fun of us.
All those are contrarian indicators, of course, and the fact that the price is up year to date is especially important; ultimately price is what truly matters. The price of gold being up year-to-date is one good sign, but it is also important to keep an eye on the price of the US dollar. While the US dollar and gold can rally together, most gold bugs (in gold for the long haul) are betting on a transition away from the US dollar and towards some type of new currency and new international monetary agreement. If the dollar is strong and proving itself to be viable, it means gold, and gold stocks GDX, could decline fairly significantly.
The Euro is its own mess, as is widely understood in the investment community at this point, and so I don't find it to be the best to watch to get an idea of true dollar strength. Rather, the Canadian dollar is what I like to watch to see if US dollar strength is real.
Below is a chart of the US dollar/Canadian dollar exchange rate; note that the US dollar has been in a downtrend against the Canadian dollar since the start of the year. Of particular interest is the consolidation over the past 10 weeks, which is highlighted in the chart.
Consolidation is a sign that the market is coiling up like a spring and ready to breakout sharply. If it breaks out to the upside -- meaning if we close above 1.01 on the USD/CAD exchange rate -- it could be a sign that the consolidation period was when big hands were quietly and aggressively accumulating dollars, and that the USD thus has real strength behind it. I would view this as being fairly bearish for gold, and strengthening the case for a weaker market in gold and in equities.
If we break down, which is what I expect, then it signals the consolidation period was a time when strong hands were exiting out of the dollar and moving into other currencies -- like gold and the Canadian dollar. We'll need to close below .9840, or perhaps even .9800, on the US dollar/Canadian dollar exchange rate to get our confirmation.
Jim Sinclair recently commented that the recent pullback in gold is like a spring coiling, ready to explode to the upside. He has also noted that the US dollar will experience decreased utilization as the world moves towards transactions in other currencies, as
China and Iran are increasingly finding themselves doing. I agree with this analysis, and think the Canadian dollar offers a clear visualization of this process unfolding.