I don’t
often feature technical analysis as the topic of the week. In this case,
however, the Dollar Index is at a crucial threshold that deserves a drum-roll
and our close attention. Notice the two tightly spaced purple lines
near the top of the chart. These are ‘Hidden Pivot’ rally targets of medium
importance, albeit of slightly different degree, and if they were to be
easily exceeded it would suggest that the steep 15% run-up since May could be
just a warm-up. To be sure, one or two technical resistance points getting
brushed aside does not a rip-roaring bull market make. However, given the
clarity of these two targets in particular, it would be quite impressive if
buyers were able to push past them without pulling back for at least a few
days for a running start. In any case, any progress above the higher
target at 91.99 would put the 92.35 target of an even larger pattern in play,
with similar implications. Which is to say, if the Dollar Index takes out
that Hidden Pivot as well, and does so with ease, it would suggest that the
bull is all but unstoppable.
A
parabolic rally in the dollar would unleash pent-up deflationary forces in
the financial sector that the Fed, even acting in concert with the central
banks of Europe and Japan, would be powerless to stop. While the banksters
have been able to manipulate short-term rates without much difficulty, there
will be no holding the dollar back when global demand for greenbacks starts
feeding on itself. Where else are you going to put your money? Lately, the
dollar has been ratcheting higher because the U.S. economy is perceived as
the strongest in the world. It is also regarded as the safest, and that is
why the dollar’s strength could be expected to continue even if the global
economy, including that of the U.S., plunges into crisis.
Bearish for Gold
Initially,
a steep rally in the dollar would be bearish for gold and very bullish for
U.S. stocks, Treasury Bonds and other financial assets. We’ve been able to
take advantage of the rally thus far by legging into very low-risk call
spreads in TLT, an Exchange Traded Fund that correlates with long-term
Treasurys. Last week, for instance, subscribers were able to complete the
second and final leg of the Jan 30 126-129 call spread 16 times at no cost.
This means they stand to make as much as $4800 on a position that cannot lose
no matter what. I’ve also recommended using TLT to hedge long positions
in gold, since any whiff of inflation strong enough to push bond prices lower
would presumably have bullish implications for precious metals.
This is
not what I expect, however, since financial-sector deflation seems to have
reached critical mass with the dollar’s steep ascent since last spring.
Although most doomsdayers have been wrong, wrong, wrong in predicting
the timing of the Big One, it has always seemed likely nevertheless that the
U.S. dollar would be at ground zero. That’s because there are vastly more
dollars swirling around in the financial ether – a quadrillion of them, by
some estimates — than the puny central banks could ever hope to manage if
forces of supply and demand were to take a mind of their own. In the
meantime, if you can think of anything that could conceivably slow the
dollar’s ascent, your thoughts would be most welcome in this forum. And
for the record, I do not mean to suggest that hyperinflation is impossible or
even unlikely somewhere down the road. But for now, deflation rules; indeed,
its opposite is what the central banks of Japan nor Europe have been
desperately praying for, with precious little success.
