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Thursday, March 3, 2011

imminent US Dollar crisis?

The US dollar has been building strength/support from a chart perspective since 2008, with the lower trend line illustrated in the first chart. From a chart perspective, if the USD breaks this trend line ,there is very little resistance from US dollar falling further. The crisis point will be 70.70.

Evidence of this is the PREVIOUS trend break, back in 2007, where the USD for the first time since 1971 (ever?), broke below 78.19, a low set back in 1992. In 2007, the US broke this level and entered a free-fall until a new low was made in March 2008.

During 2007, the US stock market made new highs, as valued in US dollars. Once the market made new highs, Oil continued to climb even after the USD dollar bottom was put in March 2008, until markets crashed in September 2008.

The USD valuation in my opinion as a key component in driving assets to extreme levels, both US stock market and resources. Notice that the USD rose rapidly mid 2008, and Oil still spiked to extreme levels, soon after the markets crashed.

The USD is currently at a level that is a critical indicator for the next crisis. Assuming the USD breaks the recent trend line, it will likely spark yet another run-away asset valuation somewhere. And USD will enter into a true crisis if it breaks the low of 70.70 set in 2008.

This is a very likely scenario in 2011. If this comes to pass, any economic recovery that is occurring in the US should be badly hurt.

It is quite likely Oil will rise with US dollar falling, but also quite likely that Gold and silver will rise much more rapidly. For in 2007-2008, speculators on overheating economies and tight supply of oil drove oil to new highs. In 2011, mid east crisis and currency crisis will drive likely both oil and gold/silver.

There is a second indicator, in the second chart, US 30 year bonds. The trend line dating back to 1985 is in jeopardy. I had previously posted that we broke this trend line, I was wrong. The tools I have don't go back to 1985 on a daily basis. The Chart Store has charts updated periodically, going back decades. From this latest long term chart, it looks like we are pressing on the downward trend line since 1985.

A combination of breaking cheaper bond rates combined with USD driving to new lows will provide a super-charged cocktail mix that should drive some asset classes to new highs. My bet is gold and silver will benefit based on previous posts. See "Time to play parabolic chicken" for investments I am interested in.

Losers will be those invested in longer term bonds, mostly over 5 year maturity. Also pure cash storage will be damaged ASSUMING the USD never returns to current levels. I think that this is quite unlikely, and instead what will occur is after a crisis occurs the USD will regain value.

This is the moment of truth, what I have been concerned over since the start of this blog, and more so since the fall of 2008, when I switched to gold and natural resources. Those invested in pure cash will need to count on USA doing the right thing to generate a sharp turn around in asset classes. I will be making the same decision, but only after gold, silver, oil, food, etc explodes upwards. The decision will be to get off the bullet train before a crash in resources......or not and keep resources to retain wealth in a spiral of USD failure.

I truly have no idea how this plays out, but this is why it is prudent to diversify into 25% resource based investments (or more).

I may be blogging in a month, crisis averted, from a chart perspective, and we have returned to the historical range. But March is likely to bring interesting events.

From a cycle perspective, Gary of the Smart Money Tracker also believes there is a high chance gold/silver and possibly other resources explode upward. Gary's view PRIMARILY uses broader market trend view of gold is in a bull run, where we are in a cycle for a commodity, and other factors.

The fact that my view of USD valuation and interest rates will drive a new USD crisis like we had in 2007-2008 is inline with Gary's method of timing markets makes for a very compelling story.

Good luck, and here are the charts, from The Chart Store.com

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