The latest on the dollar and gold.

Gold took a tumble Friday, going from 122x to 1162. As I write this, the gold price is fixed at 1157 in Asia and Europe. Here is my take on this:

For three months now we have been treated to scare scenarios as to how gold might tumble, because it is merely a commodity, earns no interest and will tumble when good economic news comes around. So, along comes the Dubai financial massacre and gold tumbles momentarily then recovers next day. Then we have this Friday and tonight when gold tumbles a total of 5%. What might be happening?

I think that people got a few facts incorrect. First, the dollar and gold move in opposite ways, so you can decrease gold price by increasing the price of the dollar. How? By buying up options in the dollar. In fact, I produced the graphic that showed a big upsurge in the volume of UUP (these are USD options to buy). So then, the buying call options on the dollar moved the dollar up and shorts had to cover. Friday's rise in the dollar was in fact a shorts squeeze. And that dropped gold.

What will happen now? Well, I think the rise in the USD is merely temporary and the shorts squeeze will reduce their ability to keep up the price of the dollar. At some point, the sale of the USD will take off again and the dollar will weaken. Meantime, use the dip to buy more gold or buy into gold mining stocks.