When time permits, I like to relax with a good mystery story. One of my favorite masters of the genre is Sir Arthur Conan Doyle, creator of Sherlock Holmes. A few days ago a story appeared on the front page of China Daily that is worthy in emulating the masters great classic: The Dog That Did Not Bark.
He might have entitled today’s story, “The Gold Trade That Did Not Rise.” The photo reveals the Premier of China Wen Jiabao and Russia’s Vladimir Putin exchanging firm handshakes and smiling broad, Cheshire grins:
The article reads:
China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade...since the financial crisis however, we began to explore other possibilities...The yuan has now started trading against the Russian rouble in the Chinese market while the renminbi will be allowed to trade against the rouble in Russia...This follows a global trend after the financial crisis exposed faults of the dollar denominated world financial system...it is aimed at the risks the dollar represents.
A mystery arises not in why the Russo-Sino action was a front-page feature on an international newspaper, but why the price of gold dropped instead of rising in the face of a discredited dollar. For the past few weeks, I have been calling for a rise in the dollar to give my readers a better reentry point for my stock selections.
I feel that some possible clues to this enigmatic action may be that the two leaders fired a warning shot across the Ben Bernanke bow. It was not to decimate dollars of which the Chinese hold major amounts. The message from Russia and China is a warning signal to the US to be careful of further debt monetizations. Moreover, there have been widely disseminated reports of dissension within the Chairman’s own team on his persistent weak dollar policies and the possible long-term negative side effects. We see that the banking system within PIIGS nations are up against the ropes and many countries are adopting austerity measures rather than receiving bailouts. The warning from Russia and China to the US is clear. Further quantitative easing will be met with swift economic actions. Other measures to support an economy must be utilized rather than debasing a currency.
In conclusion, make sure that you are wearing solid technical parachutes. I am closely observing this extended trend line on the gold chart, which should act as resistance to the upside as the previous support trend line now acts as resistance. I am expecting a reversal and break of $1,340 to confirm the negative divergences between price and momentum and change of intermediate-term trend.