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Thursday, February 24, 2011

Canary in the coal mine

The primary question for all investors and US citizens should be the stability of the US dollar and interest rates. For wealth isn't measured in US dollars, it is measured in the capital you possess, and how you can trade that capital to meet your living needs or wants.

Purchasing bonds, CD's, or having cash is just a form of storing wealth. You could easily purchase gold bars, diamonds, or rare collectible baseball cards in hopes that in the future you could use those objects for exchange for items or services you want in the future.

US cash isn't a guarantee of being a great storage of wealth. No resource is. Owning a prime real estate home in Detroit in 1960 was great, and now I doubt you'd get 1/10th the value it had then. Same is possible for Gold, etc. Similarly, US dollars could be worth less relative to other currencies and resources over time. If the US dollar slips lower, say by 50% or more, people's daily living expenses will rise. America imports significant amounts of fuel and items made by foreign countries. From an American perspective, the costs of those good would rise.

Therefore it is key to keep an eye on the value of the US dollar. But against what? Against cost of eggs? Land? Gold? I am one to not use Gold or resources as a direct correlation to USD as a clear indicator of purchasing power lost. While I agree this is worth watching, as previously posted resources could vary in value due to food shortages, or external forces like India and China purchasing habits.

So a good indicator is USD against a basket of other currencies. The US currency index (nybot:DX) is such an indicator. Reflecting back on my post "This Lifetime in charts", we can clearly see the US dollar hit an all-time record low back in 2008 and a higher low in 2009. A higher low is a good thing, it shows possible building support.

The US dollar is once again falling, and it is approaching the "danger zone" of making a lower low. Back in November 2010, in post "Public has huge faith in US dollar", the USD was hitting a critical trend line established back in 2008. The dollar reversed trend and move up.

We are now fast approaching the same critical trend line from 2008. If the US dollar breaks below this trend line, it is a strong indicator that the US dollar is headed to make a new low. If the US dollar breaks the 2008 low, from a chart perspective, the US dollar has no support. There is no historical precedence on how low it can go.

I urge everyone to put some percent in natural resources, and to further keep an eye on the US dollar. For if the 2008 trend line is broken, it is an indicator to the world that the US dollar is running into issues. If it breaks the pre-crash low set in 2008, there could be some serious issues. Combined with food prices rising, oil rising, and metals, it could get very serious.

Below is the most recent USD valuation chart. On the far right of my blog is a link to live US valuation. I'll be sure to announce when USD breaks the 2008 trend line, and freaking going berserk if it breaks below 2008 level, at 70.

A failure of USD in the currency market place, combined with a failure for US federal bonds to keep within a 25 year trend of lower cost for debt, is a clear canary in the coal mine for USD backed savings, such as bonds or cd's. These two events combined will be our dead canary.

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