It had to happen eventually.
Nothing moves in a straight line in either direction, up or down… and when it does, there’s clearly room for a correction.
In this case, I’m talking about the dollar, which has surged in the last week.
What a roller coaster ride– we watched it continually slide for years against major currencies while the credit bubble fueled capital flows into foreign currencies and commodities. When the bubble finally burst last year, capital came flooding back to the dollar as fast as a cracking whip. Within months, though, the dollar’s slide started again.
Since its recent peak in March, the dollar index has slid 16%, including a nasty spill of 6% in May, and another 5% drop since the beginning of September. Frankly, the dollar index would be looking much worse if it weren’t for the even more terrible economies of Sweden and the UK, whose currencies comprise part of the index along with the yen, euro, Canadian dollar, and franc.
Sure, the dollar’s fundamentals are exceptionally weak, but such a rapid slide is unsustainable without a brief recovery period. A dollar rally has nothing to do with renewed confidence in the dollar; rather, it is simply a matter of investors taking advantage of the dollar’s ‘cheapness’ to buy US assets.
Additionally, when investors start feeling a bit skittish again about world economic prospects, they tend to rush back into the dollar to buy the ‘safety’ of US Treasury securities. This is happening now, to a degree– investors may be realizing that the extreme stock market rallies we have seen recently are clearly overdone, and that the world economy is not yet on solid footing.
Overall, these are indications of strength for the dollar, and explain why the dollar index shot up 1.5% in the past week. Like I said, it had to happen eventually.
To be clear, the dollar’s fundamentals are not improving in the slightest; they’re getting much worse– more paper, more printing, more debt, more obligations, more stimulus programs, more political pandering.
As to how long the rally will last, though, is anyone’s guess… it could be days, weeks, or months, or possibly longer. For example, another major financial crash could create a stampede for US Treasuries again, just like we saw last year, and the dollar will surge. Whatever lift the dollar gets, though, will only be temporary.
Unfortunately the timing on these things is impossible to predict; that’s why I’m looking longer-term. I don’t know what’s going to be happening in the markets tomorrow or 3-months for now, but I’m pretty confident I know the general direction over the next few years– consequently, I’m buying gold and silver futures from 2011-2013.
For example, July 2012 silver contracts are selling for about $16.94/ounce. Based on the dollar’s fundamentals, I can easily see silver in the $25 to $30 range by then. I don’t have to be right by tomorrow or next month– I have two and a half years for the market to reflect the reality of an overly inflated currency.
If I’m right, I stand to make a lot of money. If I’m wrong, I will be happy to take delivery of 5,000 ounces of physical silver.
