In most recent Trading Thoughts we reported that the largest purchases of U.S. government debt by foreign official institutions had occurred in the prior week. Initially, reason for those purchases was a mystery. That is, until Russia decided to crush Georgia militarily. Russian army does not move into invasion mode without some prior preparations. Someone knew what was to happen. Massive amount of money flowed, at a $1.4+ trillion annual rate, into U.S. debt in less than a week.

Those financial transactions had two ramifications. First, a shortage of dollars was created which caused value of dollar to spike upward. Second, as payments for those bonds were made, a massive amount of liquidity flowed into the Street. That excessive liquidity quickly flowed into financial markets, causing a 300+ point DJIA rally. As news of the Russian mini-blitzkrieg spread, others fled to the dollar.

As this week's chart shows, U.S. dollar spiked upward on this panic buying. U.S. dollar is now as over bought as it has been. Note that each time dollar has spiked upward, another down leg was not too far off. Why does this happen? Most Forex trading systems are nothing more than momentum models. Some time is required to turn such models bullish. By the time they turn bullish, the move is old and they come in late.

With the U.S. dollar incredibly over bought, Gold is on the bargain table. Rarely have we witnessed Gold this over sold for this long. Investors should be buying Gold while funds are pushing dollar to unsustainable levels. With “Putin, the Terrible” running rampant in Russia and calendar moving toward Israel's “Window of Necessity” on Iran, Gold is a must for portfolios

By Ned W Schmidt CFA, CEBS

GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report , monthly, and Trading Thoughts , weekly. To receive copies of recent reports, go to http://home.att.net/~nwschmidt/Order_Gold_EMonthlyTT.html

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