Back in March we had a strong clue there was going to be a decent sized dollar bounce or at least the decline would stall. Were you paying attention? Here was the clue in case you missed it.

Since then dollar bears as well as gold bugs have been severely tested. Covers like that often mark major turning points. Sometimes it’s just best to step to the sidelines and wait things out. I am still waiting to get back into gold but as long as the FED keeps hiking and Europe and Japan headed for or back in recession, dollar bears and gold bugs are both likely to remain frustrated. Is it possible there are too many bottom callers on the $HUI? Let’s take a look at some charts:

US$ Weekly

US$ Monthly

Gold Weekly

Judging from those charts, both dollar bears and gold bugs might be in for still more of a rocky road. Recently we talked about How well gold might do in inflation vs. deflation. Here is my key belief: Gold and likely miners will do well when the FED pours on the liquidity spigot to fight the upcoming deflationary credit crunch. My view is that they will NOT be successful any more than Japan was, but the fighting will be beneficial to gold.

Right NOW the FED is fighting inflation, the UK appears headed for recession, Japan IS in recession, and the EU is at the brink of recession. I believe those are supportive of the US$ and have been supportive of the US$ for quite some time. Whether or not I have the reason correct, the charts point to more consolidation and/or more grief.

Ultimately gold will shine. This is just a temporary setback. But having suffered thru several of these I am happy to be on the sidelines for this one. My expectation, which could easily be wrong, is that the US economy is on the cusp of turning. Bear in mind that I have been brutally WRONG about how many hikes it would take to crush housing but if the UK and Australia are any indication, we have about 3-6 months lag before we hit the brick wall. What the FED does at that time will determine where gold is headed.

I think new highs are ultimately coming BUT there just might be more frustration in the meantime. Define your timeframe and your risk and the rest will likely fall into place.

Mike Shedlock / Mish/