Here is what Chandler had to say:  “We are seeing general strength in the US dollar, despite the fact that the Fed is engaged in quantitative easing of an unlimited nature, and despite the fiscal cliff looming.  Right now the euro is trading at two month lows against the dollar. 

The broad-based US dollar strength has caught the market wrong-footed, and I am still bullish the US dollar in spite of the approaching fiscal cliff.  But a date is certain.  We know this is going to be resolved one way or another by December 31st.

However, the European crisis is of an unknown nature....

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“There is no fixed date for Europe like there is for the US.  The Greeks are saying they are going to run out of money in the middle of November.  Maybe they can stretch it until early December, but that won’t end the uncertainty coming out of Europe.

For instance, we still don’t know when Spain’s Prime Minister is going to formerly ask for assistance so that the ECB can begin buying and supporting their bonds.  Spain’s bonds are under strong downward pressure once again in recent days.

So when I look at the world today, I see a lot of ‘event risk.’  The US fiscal cliff, what’s going on in Europe, and problems between China and Japan, which is now beginning to affect the Japanese economy.  Earlier today, the Japanese reported the first current account deficit since 1981.

We still have the Iranian situation, and nothing is resolved in Syria.  So I look at all of these things, and what is very concerning to me is that the implied volatility in the markets is still very low.  This means insurance to protect oneself from these ‘event risks’ is still inexpensive.

The questions is:  How is this contradiction between low volatility and high event risk on the horizon going to be resolved?  I think it will be resolved in the direction of higher volatility.  I want to emphasize that what typically happens in a higher volatility environment is the global equity markets fall, and the euro falls.  So when I talk about volatility, there is clearly a directional bias to it.

Having said that, the next key level for the US dollar index, assuming that it can maintain a weekly close above the 80.70 area, right now it is at 80.85, but if we get do get that weekly close above 80.70, I could see a quick move to the 82 level.

If the dollar index can get comfortably above the 82 level, that would trigger the 84 target on the US dollar.  If you look at the euro right now, the non-commercials have net short position of about 58,000 contracts.  This short position in the euro is down about 75% from what is was in June.

So there has been a massive short covering in the euro as the European officials reduced the extreme tail risk of the eurozone blowing up.  But it seems to me that move is over now, and I think we are looking at a resumption of the euro decline.

What happened is there was a huge rally in European stocks and bonds as well as the euro, because as the tailwind risk of the eurozone blowing up was removed, global fund managers, which were underweight European assets, were forced to move to ‘benchmarks.’ 

So at that time it forced those managers to chase the market higher in terms of European assets.  But as I said, I think that move is now over.  For what it is worth, my sense is that these fund managers are going to go back to an ‘underweight’ position.

The euro is struggling around the 1.28 level, and I’m looking for the euro to head to the 1.22 - 1.23 area by the end of the year.  The US is going to resolve the fiscal cliff, which means the focus will shift right back to the euro when Spain asks for aid.

I would also add that the issue which had died down in Europe, but is now resurfacing, is a Greek exit.  Imagine if Greece would drop out what would happen.  If there is in fact a regime change in Syria, that would greatly hamper the Russian influence in the Middle-East. 

So if Greece leaves the euro or is kicked out, they would have to turn to Russsia for assistance.  Greece is unimportant economically, but geo-strategically it is key because it is a valve in and out of Europe.  So when we think of the ongoing European crisis, keep in mind Greece’s geo-strategic importance.”

I would just add to what Chandler has said here that if the US dollar continues to strengthen, this would leave more sideways chop and consolidation in the gold market.  This would be healthy, and it would be ideal for those who are hoping for a completion to a cup and handle formation in the gold market. 

If the cup and handle completes the formation and resolves to the upside, that would usher in the upside explosion that John Hathaway has predicted which would take gold to new all-time highs.

© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

The interviews with John Hathaway, John Embry, Stephen Leeb, Don Coxe (BMO $538 billion), Rick Rule, James Turk and Egon von Greyerz are available now.  Also, be sure to listen to other recent KWN interviews which included MEP Nigel Farage, Jean-Marie Eveillard, and Art Cashin (UBS $612 billion) by CLICKING HERE.

Eric King

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© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast,

rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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