I just looked at the data comparing the performance of the US dollar index ETF (UUP) vs. the gold ETF (GLD) for this last dollar rally that is based on what I refer to as the European Panic Scenario.  What happens in that scenario is that you have US dollar UP, Gold UP and Stocks DOWN.  That is what happened.

The starting point prior to the first day of the rally in the US dollar and gold was 5-4-2011.  Since then, up to the day before a resolution of the Greek situation seemed probable, which was 6-16-2011, UUP closed @ 21.59 and GLD @ 1148.97  , the gain in the US Dollar Index ETF UUP was 3.0% and the gain in GLD was 0.84%.  That tells you that gold is a reasonable second compared to betting against US dollar index currencies (by buying UUP for ex.)  in the European Panic Scenario.  Realize that GLD did better than holding plain US dollars.  Holding the UUP is not the same as just holding dollars as it is a bet that the US dollar will go up relative to the US dollar index currencies.  Gold was better than plain old US dollars during the European Panic Scenario that just unfolded.  But UUP was better than GLD which was better than US dollars held in your pocket.

The one scenario in which gold could lose value and US dollar could gain value is the Deflation Scenario.  Dollars become worth more as prices of homes, computers, and commodities fall.  Massive deflation is highly unlikely as the Central Banks of the world will not likely allow that to happen.  They will continue to print money if needed.  Still, it is possible that mild deflation may now occur with the Fed’s hands off the printing press for a while and with Congress fighting the deficit.  That means gold could correct somewhat if this mild deflation shows up.

Gold has a bright future, because there is no currency backed fully by gold and held by a stable government (one that won’t change it’s policy on gold!).  Even the Swiss went off of the gold standard on May 1, 2000 after a public referendum.  Who said the public are smart.  So if you want to buy a gold backed currency, you just have to buy gold.

The US dollar is down but not entirely out.  My current view is that the buck may pull back to the mid-June low and resume its rally.  This is simply one target however.  The most pessimistic view would be that the dollar is headed down in its continued decline.

As for the SP500 index, the markets are bouncing from support as discussed in my last FREE newsletter.  The March lows were fully tested by the small caps (small cap value went below that low), while the SP500 Index got close.  Realize this bounce could be a limited one that brings us back up to first resistance, so you may have to be nimble to preserve profits.   The impact of the end of QE2 on interest rates is still unclear as discussed (see prior posts to right).  I created a PDF that lays out the various scenarios for Stocks, the US Dollar and Gold.  It is a must read – you need to understand how the markets interact to be a successful investor – and it is accessible to FREE newsletter subscribers.  Please subscribe for using the link here:  Free Market Tracking Newsletter

I explained why investor sentiment is supportive of a rally last Thursday: Investor Sentiment Allows for a Bounce

Standard Disclaimer: Remember, it’s your money and your decision as to how to invest it.

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