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The drubbing of the dollar: dangerous or therapeutic?

Section: Daily Dispatches

By Peter Brimelow
CBSMarketWatch.com
Monday, January 3, 2005

http://cbs.marketwatch.com/news/story.asp?guid=%7B60A812F7%2D6058%
2D4182%2D9F78%2D19B0745BFE73%7D&siteid=mktw&dist=

NEW YORK -- U.S. stock exchange operators might have
wondered why they were being dragged into work at all
last week.

As Profitable Investing's Richard Band noted Thursday in
his weekly Hotline:

"You can hear a pin drop! Christmas week is often a slow
time on Wall Street, but this week -- indeed, this whole
month -- has been quieter than normal. If we look at the
average daily percent change in the S&P index, the past
20 trading days have been the calmest since October
1996 -- more than eight years ago."

But this was far from true with gold. Wednesday's
74,000-contract, $9 down day was one of the year's
heaviest and most volatile.

And even before that, in a short week for many of the
world's markets, the steep rise in the number of Comex
contracts outstanding ("open interest") on Monday and
Tuesday had tsunami-sensing gold veteran
Lemetropolecafe.com's Bill Murphy bristling:

"Gold open interest rose sharply in holiday market
conditions by 9,501 contracts to 329,038. This is how
much firepower the bums had to throw at gold to keep it
from soaring above $445. It is also the reason the gold
euro price went down yesterday, as well as today."

(Murphy takes a conspiratorial view of gold bears -- but
hey, his bullishness has been justified since 2001.)

There's a reason for gold bugs to bristle. The last week
of 2004 also saw the U.S dollar make a record low
against the euro (which many assume gold mirrors).
The Dollar Index (which tracks the dollar against a
basket of major currencies) closed the year essentially
at a 9-year low.

As Australia's highly sophisticated www.the-privateer.com
pointed out: "In the history of the unique reserve currency
backed by nothing which is the post-1971 US Dollar, it has
never gone below (for more than a day or two) the 80.00
level on the ...$US index."

The Privateer also notes that when the Dollar Index was
last at these levels, in early December, gold was $17.60
(4 percent) higher.

Gold did sustain some moderately serious technical
damage last week. Judging by the reviving bearishness
of The Gartman Letter, this is shaping the thinking of the
institutional speculators this expensive letter serves:
"We said that we'd likely not become bullish of gold
again until spot traded back to $400/oz. We may get
our wish. ... However, if there are some who might
choose to venture bearishly of gold, we'd not argue with
them too strongly at this point."

But these players may be getting too bold too soon.
According to data reported on LeMetropoleCaf, India,
the world's largest gold importer -- which was open all
week -- became an even stronger buyer as prices fell.

And the comparatively unperturbed response of gold
equities caught the eye of the hitherto pessimistic
technician Martin Pring. He lays extremely heavy
emphasis on the idea that gold shares lead the bullion
price. Recently, he remarked in his Weekly Review:

"One ray of hope comes from Gold Bugs Share Index
... since this series has just marginally experienced
an MA [moving average] crossover. If so, it could
represent a bullish thin-reed indicator that the shares
are headed higher and might just lead the metal in the
same direction."

The Hulbert Financial Digest reports its Hulbert Gold
Newsletter Sentiment Index (HGNSI), which represents
the average exposure to the gold market among a
subset of short-term gold timing newsletters, now stands
at 5.36 percent. That's not at all high by historic standards.

It's even lower than when gold last dipped into the $330s
in December. And at that time, Mark Hulbert rightly
thought that from a contrary opinion standpoint, the
collapse in adviser exposure was a positive sign.

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