Back in May, the dollar set an intermediate cycle low on extremely poor sentiment. Due to the extremity of bearishness seen at that point, I assumed that the low also marked a multi-year cycle low for the dollar. However, a couple of interesting technical patterns are forming on the gold and dollar charts which may indicate that the inflation trade may still be on for a couple more months. Beginning with the dollar...
One must be at least a little intrigued by the fact that Eurozone troubles have rekindled without sparking a major rally in the dollar. This relative weakness may be a major clue that the dollar still has a strong bout of selling ahead. Furthermore, the fact that commodities have rallied strongly this week despite a higher dollar may also be a clue that big traders are sniffing out the next round of inflation.
Like the dollar, gold is forming a triangle consolidation that may be a continuation pattern.
Based on cycle analysis, which I detail in the Member Letter, a major dollar low would be set 2-4 months from now if these moves resume. Since the dollar would be sinking into a 3-year cycle low, a sense of panic should surround the move, especially as commodity prices shoot higher... the FOMC's reward for abusing our currency. However, multi-year cycles in both stocks and commodities are due to set lows in 2012. Therefore, once these potential rallies complete their work, we should see multi-month declines in both asset classes.