Commodity Trade Mantra

Gold and Silver have Nothing to Fear about the US Dollar – Chart Outlook

Supremacy of US Dollar as Global Reserve Currency is Doomed

Supremacy of US Dollar as Global Reserve Currency is Doomed

Because the US dollar has such an important bearing on everything, especially the Precious Metals, it is timely for us to take a close look at it here after its recent steep drop, for as some of you may have seen, a number of indicators pertaining to the dollar suggest that, possibly after some further downside it is likely to bounce, or at least take a rest in a sideways range for a while, before the decline perhaps resumes in earnest.

We’ll start by looking at a couple of these indicators. The latest US Dollar Hedgers chart, which is a form of COT chart, is certainly starting to look bullish, and until these positions ease somewhat, further significant downside for the US dollar in the short-term looks unlikely.

Meanwhile, the latest Dollar Optix, or optimism chart, also shows that pessimism is getting overdone. This doesn’t necessarily mean that the dollar’s downtrend is done, however, as minor rallies can cause this to ease before it then plumbs new lows. These two indicators taken together suggest that a relief rally is likely in the US dollar soon, perhaps after it drops a bit lower first, although they don’t mean that the rally will get very far.

The Weak US Dollar & the Bullish Gold and Silver Scenario

Alright, so how does this square with our stated super bullish position on the Precious Metals, gold and silver? Well, it doesn’t, of course, since a dollar rally normally means that gold and silver will drop back. So what’s going on here? The latest COTs for gold and silver were super bullish, especially silver, which was even more bullish than late 2015, and the key point to make here is that they remain so, regardless of any other considerations or what is going on elsewhere. This being so it means one of two things—either the US dollar and gold and silver are going to rally in unison, unlikely but possible, or after some kind of relief rally or consolidation pattern, the dollar’s decline will resume, perhaps with a vengeance, and as we will see it could possibly accelerate into a crash.

Turning now to the charts for the US dollar itself, we start by looking at its latest 9-month chart. As we had already figured out a month or two ago, it is being forced lower at an accelerating pace by a parabolic downtrend. Now we are arriving at a critical juncture above key support with the key indicators above suggesting a bounce or a pause in the decline. However, should the parabola force a breakdown below the support, a really severe decline or crash will be in prospect.

On the 4-year chart we can see how the parabolic downtrend has forced the dollar down towards the key support approaching the lower boundary of a large bearish Broadening Formation. While several indicators are suggesting that it will take at least a breather here, if it does break down the consequences for the dollar are likely to be dire—and this could be the message of the super bullish gold and silver COTs.

It’s also useful to look at the 4-year chart for dollar proxy, the PowerShares US Dollar Index Bullish Fund, which looks about the same as the dollar index chart, except that we can also look at volume and volume indicators. The Accum-Distrib line in particular is extremely weak, and gives us an additional clue that the dollar may be in the early stages of a really serious decline. Again, this could explain the strongly bullish gold and silver COTs.

Actually, it’s not hard to understand why the dollar could crash soon. Those in control of the U.S. have been struggling to maintain the US dollar’s supremacy as the global reserve currency for years, which has involved the maintenance of a massive military machine spanning the world, with hundreds of overseas military bases designed to project power and impose dominance. Those who have dared to challenge the dollar’s hegemony, by attempting to trade in other currencies, like Qaddafi and Saddam Hussein, have been killed and their countries left in ruins. Now the rising Eastern powers like China are threatening the hegemony of the dollar, but they can’t be attacked because they have nukes and can strike back. Russia has nukes too and so can’t be attacked physically, except perhaps by means of a “1st strike” and its parallel drive to escape dollar hegemony is the reason that it has instead come under economic assault via an artificially low oil price and sanctions, and why the democratically elected government of the Ukraine was overthrown by heavily bankrolled neo-Nazis to install a pro-U.S., anti-Russian puppet government.

The point to grasp in all this is that, to put it crudely, the U.S. has managed to “piss off” most of the world, with its heavy handed approach to maintaining dollar dominance using military force when it can get away with it, the only countries pleased with its efforts being Israel, sidekick countries like Poland and the UK, and client States like Saudi Arabia, who are in for a big shock when they discover, after Iran has been dealt with, that they are no longer important. The East is playing a carefully calculated game to rid itself of US dollar dominance, and those of you who have read “The Art of War” will know that they are not to be underestimated—thus the continued US threat of using brute force, exemplified by the extremely provocative and thuggish NATO military exercises hard up against the Russian border in Latvia and Poland, etc. that took place not too long ago, will be blunted and turned against it. What is likely to happen is that the East will gradually circumvent the dollar until the U.S. economy collapses, no longer able to afford the huge burdens of its massive debts, welfare state and the military drain. This makes the situation very dangerous, because the U.S. will be tempted to use force to maintain its dominance while it can still afford to.

Finally, we will take a quick look at the very long-term 20-year chart for the US dollar index. This chart makes plain that if the US dollar has peaked, and is soon to enter a severe decline, it won’t be the 1st time in the past two decades, as between 2002 and 2008 it suffered a massive drop—and that was long before it was threatened with being delisted as the global reserve currency. This chart also shows that it could drop a long, long way from the bearish looking Broadening Top that may now be approaching completion.

Conclusion: the latest extremely bullish COT charts are not negated by the dollar being oversold here and some of its indicators looking positive. The bigger picture is that the US dollar may be headed for a breakdown and severe decline or even a crash. – Clive Maund

The U.S. Should Relinquish Reserve Currency Status for its Dollar – Here’s Why

Conspiracy theory notwithstanding, claims that the reserve status of the US dollar unfairly benefits the U.S. are no longer true. On the contrary, it has become a burden, both for America and the world. [Let me explain.] – Michael Pettis

Reserve currency status is a global public good that comes with a cost [and] no currency [other than that of the U.S.] has the necessary characteristics to allow it, plausibly, to serve the needs of the global economy – and neither any other country, nor the EU, will be willing to pay the cost. If the U.S. dollar’s status is to decline in the future, it will require that Washington, itself, take the lead in forcing the world gradually to disengage [and,] ironically, that is exactly what Washington should be doing…

The Pros and Cons of Having the US Dollar as the Reserve Currency

During the first few decades of the post-war period, the cost of maintaining the dollar’s status could be justified by the incremental benefits to the U.S. of a stable and growing world economy, within cold war constraints. Beginning in the 1980s, [however,] trade policies abroad have sharply raised the cost to the U.S. while the end of the cold war has limited the benefits.

The cost [to the U.S.] comes as a choice between rising unemployment and rising debt. The mechanism is fairly straightforward. Countries that seek to supercharge domestic growth by acquiring a larger share of global demand can do so by gaming the global system and actively stockpiling foreign currency, mainly in the form of, but not limited to, central bank reserves.

In practice, US dollar liquidity, limited Washington intervention, and the size and flexibility of US financial markets ensure that countries (such as China) stockpile dollars. There is no alternative, and most other governments would discourage substantial purchases of their own currencies. [This] foreign acquisition of dollars, [however,] automatically forces the U.S. into running a corresponding current account deficit. Active trade intervention abroad, in other words, is accommodated by rising trade deficits in the U.S.. This importing of US demand by other countries forces the U.S. economy to respond in one of two ways:

  1. American unemployment must rise as demand is diverted abroad, or
  2. Americans must counteract the employment impact by increasing domestic consumption or investment.

Without government intervention, there is no reason for domestic investment to rise in response to policies abroad. On the contrary, with the diversion of domestic demand private investment may even decline. [As such,] in order to limit the impact on jobs, capital flows into the U.S. must finance additional US consumption. Americans, in other words, must choose between higher unemployment and higher debt. In the past the Federal Reserve has chosen to encourage higher debt.

The Benefits to the U.S. of Reserve Currency Status

Analysts argue that the predominance of the dollar [benefits] the U.S. in two ways:

  1. reduced cost of imports and
  2. lower government borrowing costs.

Both arguments are flawed.

[In the first case,] Americans over-consume and don’t need lower consumption costs, especially at the expense of employment. [Furthermore,] if cheaper consumption is really such a gift, it is hard to explain why attempts by the U.S. to return the gift – by demanding that foreigners revalue their currencies and so reduce costs for their own consumers – are always so indignantly rejected.[In the second case,] creditworthiness matters more than currency status. Reserve status increases US borrowing, and thus undermines the ability of the U.S. Treasury to finance itself cheaply more than would losing reserve status.

Conclusion

The large imbalances that the US dollar foreign reserve system has permitted now destabilise the world. If forced to give up the dollar the world might see global trade reduced somewhat, and it would probably spell the end of the Asian growth model. [On the other hand,] it would also lower long-term costs for the U.S., and reduce dangerous global imbalances.

The U.S. should, therefore, take the lead in shifting to multi-currency reserves, in which the dollar is simply first among equals.

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