Gold, the Dollar, and Current Market Outlook

Source: http://www.expectedreturnsblog.com/2010/07/gold-dollar-and-current-market-outlook.html

We are dealing with a very volatile market; it’s hard to trade with conviction either on the long or short side. That being said, I am leaning bullish. This is the type of “emotional” market longer term investors should welcome with both arms, since value invariably rises from the ashes.
Gold
Gold is currently oversold. These kind of oversold conditions usually result in an obligatory rally.  I am twiddling my thumbs waiting for an opportune time to scoop up gold shares on the cheap. I am expecting tremendous value to present itself in the next week or so.

Gold is simply putting people’s conviction to the test. Most people can’t take the pain, which means they will realize very little of the gain, as always. To prevent letting your emotions dictate your decisions, pick out price levels in which you will add to your positions in advance.

The next level of support is between $1165 and $1170.  A breach of these levels and we will likely test $1130-$1140. At this point, many a gold bull will throw in the towel as gold bears gloat over their ostensible victory. I will be buying aggresively at these levels.

U.S. Dollar
Lost in the sea of economic data is the fact that the U.S. dollar is rolling over. Since the dollar peaked in early June, the S&P has given up nearly 100 points. For the time being, stocks and the dollar are not trading inversely.
There will be huge panic-driven swings in the dollar in both directions. Although capital is generally flowing into the dollar, money can flow out of the dollar just as easily. Keep in mind that capital flowing into the dollar is fear-driven as opposed to fundamentally-driven. This distinction is crucial. It is one of the key reasons why the dollar will paradoxically fall harder the higher it goes.
The gradual devaluation of the dollar is inevitable. It will most likely be disorderly.

Market Outlook

I truly believe the coming volatility in markets will wipe out both bulls and bears. While I believe there is value in stocks at current prices, a steep drop in stocks is not out of the question. My plan is to patiently scale into select gold and silver shares. There is no rush to go all-in at current levels.
On a 3-5 year time horizon, the real value is in gold- there is no question about it. The sovereign debt crisis currently unfolding is one that has occured over and over in history. I don’t see how we will avoid restructuring the global currency regime. Sooner or later, there will be a sharp drop in the dollar attended by a sharp rise in gold. The mad rush into the dollar is eerily similar to the mad rush to buy homes. This is the type of self-fulfilling dynamic you can only recognize if you take a step back from the madness.
I am watching the current sell-off in gold with great joy. Everyone is talking deflation. Everyone is talking gold bubble, even though  no one can pull the trigger at current prices. Overall sentiment in the gold space is turning decidedly bearish. You all know what this means- it is time to start accumulating.