Is the worm turning for the U.S. dollar and for gold? That may be the case. The dollar has been rising in value against most major foreign currencies all year long. On the other hand, gold has been locked in a trading range for the past several months. Now it appears that the dollar may be resuming the downward trend that had been in place for three years prior to 2005. Gold seems to be poised to break out of the trading range it has established during 2005 and ready to move to new highs.

Will these things actually happen? Stay tuned, because it appears we are about to find out.

To help you get an orientation to what we are writing about, check out the chart above. It is a picture of the long term decline in the U.S. dollar index going back to 2002. You can see that the downward trend reversed in early 2005. But now it appears to be reversing again.

The next chart concentrates on a shorter time period. You can see the dollar index declining into the beginning of 2005. It then reverses course and rises into February; only to fall back in March; and finally to rise significantly until July. Since then it has reversed course, and clearly broken the short term upward trend.

The only problem with charts like this is that you never really know what is going to happen next. You can only make a best guess. But our “best guess” is that the downward trend has resumed.

SO WHAT, you say? If you own mutual funds such as Loomis & Sayles Global Bond Fund, or PIMCO Foreign Bond Fund, or Oppenheimer International Bond Fund—and many of our clients do—they may be about to become a whole lot more profitable holdings. They go up in value when the dollar goes down.

Gold also seems poised to resume its upward trend and become a much more interesting holding. That makes sense; if for no other reason, than gold and the U.S. dollar seem to be quite counter cyclical. So, if you own Gabelli Gold Fund, or U.S. Global Investors World Precious Mineral Fund, or Street Tracks Gold Shares--and many of our clients do—they could be about to get a lot more profitable too.

If you take a good look at this chart it is quite revealing. Notice that gold prices bottom out in February, May, and July. But each time they bottomed out, the “bottom” was a little higher than the previous time. That is often a sign that eventually a rising trend will reassert itself. It may be the case that we are about to find out.

Frankly we think that is what is going to happen. The dollar down and gold up.

Stay tuned!

All the best,

Paul Krsek
For K&A Asset Management, LLC

Disclosure and Disclaimer (updated 11/28/05):

E-lluminations and Illumination are proprietary newsletters written for clients, friends, and affiliates of K&A Asset Management, LLC (K&A).

Paul Krsek is the sole author of E-lluminations. While the views and representations found in the newsletter generally reflect the attitudes and opinions of the K&A Asset Management “team”, Krsek writes without editing and therefore is solely responsible for the content and opinions contained in E-lluminations.

Illumination is normally published as a joint effort by Robert Andreae and Paul Krsek.

Neither E-lluminations nor Illumination represents the opinions of Fidelity, Fidelity Institutional Brokerage Group, NFS or any Fidelity affiliates. Neither Fidelity, Fidelity Institutional Brokerage Group, nor NFS has participated in the creation of E-lluminations or Illumination and they are not responsible for their contents or distribution.

E-lluminations and Illumination are written to provide general information to clients, friends, and affiliates. They are not to be taken as individual investment advice. No investment decisions should be made based on the opinions or information offered in E-lluminations and Illumination. 

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The investment objectives of various accounts may be substantially different from one another. Therefore topics or investments mentioned in E-lluminations and Illumination may or may not apply to specific managed accounts.

Trades or adjustments to accounts mentioned in E-lluminations or Illumination may or may not happen in every account managed by advisor representatives at K&A. Advisor representatives are not responsible to manage every account similarly. Advisor representatives are responsible to manage accounts according to their understanding of the investment objectives, suitability and time frames of the owner of the account.

If you are not satisfied with the investment results in your account it is your responsibility to inform your advisor representative and to discuss possible changes that can be made to the account to accommodate and satisfy your needs.

The assets held in managed accounts at K&A Asset Management, LLC may include stocks, bonds, cash, commodities, foreign exchange or mutual funds, money market accounts or limited partnerships that represent the same. They are subject to market fluctuation and the potential for losses. The assets are not insured. The value and income produced by these investment products may fluctuate, so that an investor may get back less than they initially invested.

The advisor representatives at K&A Asset Management, LLC do not guarantee results.

Past performance should not be considered an indicator of potential future performance. If you do not consider yourself suitable, either emotionally or financially, to experience volatility and/or losses in financial markets, you should not invest.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy any securities or other instruments mentioned in it.

Sincerely,

Paul Krsek
Updated: November 28, 2005

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