Dollar Danger Zone

The US dollar has been the world’s reserve currency since Bretton Woods – about 70 years.  The power and importance of Middle-East oil and the US economy and military have supported the dollar for about 40 years.  Quick story:

  • The world buys oil in dollars. (Thank you Saudi Arabia and Kissinger.)
  • Therefore the world must purchase (support) dollars to obtain oil.
  • The US supports the oil producing nations with military might.
  • The oil producing nations collect dollars in exchange for oil and recycle those petrodollars back into US T-bonds and equities thereby supporting the dollar and the US stock and bond markets.

The process works exceedingly well for the US since, as Bernanke noted, we have a printing press and can “print” the dollars to pay for oil and other imported goods.

But how much longer can the US maintain this dollar support process?  Consider:

FUNDAMENTAL ISSUES:

  • AIIB: The Asian Infrastructure Investment Bank is clearly a threat to dollar dominance.  Over 50 nations joined, including the UK, France, Germany, and Australia.  This will weaken the dollar’s importance in world trade.
  • China has purchased and imported a massive amount of gold bars in the past 5 years. The magnitude of the gold migration from the west to Asia has been obscured intentionally.  Clearly the western central banks and governments do not want the world to know how much gold they have sold to China.  China does not want to announce how much gold they have purchased, which might panic the gold market and elevate prices, making additional purchases more expensive.  China’s gold hoard will become a threat to the reserve currency status of the dollar, a fiat currency backed only by “faith and trust.”
  • China will announce their gold holdings when it is convenient and beneficial to China. They might even tell the truth.  Worse, they might demand the US and the UK tell the truth and produce auditable reports on their remaining gold.  An audit could be catastrophic for the relative value of the dollar.  Since consequences might be destructive to all parties, a “trust me” solution will probably be found unless China is ready for an all-out assault on the dollar.  The dollar is clearly in danger if China announces total gold holdings close to or larger (likely) than the official US gold stockpile.
  • Reasonable analysis by many individuals and organizations suggests that much of the gold supposedly held by the US and UK is gone. Do not expect official confirmation.  Regardless of denials and obfuscation, gold is important for confidence in all currencies.  Admitting most of the US gold has been “leased,” sold, or stolen will create a danger zone for the dollar.
  • “He who has the gold makes the rules.”
  • We no longer hear, “The dollar is as good as gold.” Could that change in the next decade to “The yuan is as good as gold?”

CHART ANALYSIS

For a long term perspective, examine the monthly chart of the dollar index.

Dollar Index Monthly

For an intermediate term perspective, examine the weekly chart.

Dollar Index Weekly

What I see in the charts:

The dollar index made major turns in 1995, 2001, 2008 and 2015, about every 6.5 years.  Note the vertical blue lines on the chart and the following comments regarding changes in the S&P 500 Index:

  • 1995: The S&P began a major move from about 470 to about 1,570.
  • 2001: The S&P peaked in 2000 above 1,500 and corrected from there.
  • 2008: The S&P crashed in 2008 and bottomed in early 2009.
  • 2015: The S&P made a new all-time high in early 2015.

The monthly dollar index has moved too far and too fast.  Further, major turns in the dollar are often associated with turns in the S&P and general economic activity.  Be cautious.

The weekly chart of the dollar index (April 29) has broken the up trending red support line, as I have drawn it.  This could be the start of a major dollar index downturn.  Be cautious.

Could the dollar index strengthen and rally further?  Almost anything is possible in central bank managed currency, bond, and equity bubbles, but this looks like a danger zone for the dollar.

HEADLINES – More Danger Zone Concerns:

Boston Fed Admits There is No Exit”  If the Fed can’t exit QE and has to “print” to infinity (“QEfinity”) that indicates long-term weakness ahead for the dollar.

Going the Way of the Mayans – End Game of Global Debt Addiction” (Blame the policy makers.)

$3 Trillion in negative-yielding Eurobonds are a time bomb so buy gold

World Faces New Collapse Under Strong Dollar:  ‘We’re Going to Have Another Financial Crisis’”

Correction Ahead?  Investors Exit Stocks

Gary Christenson

The Deviant Investor

 

 

 

7 thoughts on “Dollar Danger Zone

  1. You’re darned skippy it’s LIKELY China’s reserves are greater than the US’s scattered abundance of rehypothecated gold paper claims (dozens of times over.) In fact, I believe it is likely that China had more gold in 2009 when they last announced (1000 tons.) Lol. And I am being serious, and don’t call me Shirley.



  2. There are some inaccuracies in this analysis that are worth addressing. The most important of these is that only US Banks (and foreign banks with US affiliates) can hold dollar deposits. Thus, if a US entity buys say, $100 of oil from Saudi Arabia, the seller gets $100 in a US bank account. This money never leaves the US.
    The seller can, however, use this deposit to make investments or purchase goods and services in US dollars, sell it for another currency or “transfer” it to a foreign bank. In the latter case, the US bank will issue a “due to” of $100 to the foreign bank that will show it on its balance sheet as a “due from” the US bank. No money has moved, just the claim on the deposit. This claim is called a Eurodollar and can be loaned to third parties – which is generally what happens. Bottom line, the initial claim can be multiplied under a fractional banking system as many times as local and international regulators permit. Every Eurodollar created in this process is really a short position against the dollar because foreign Eurodollar borrowers will need to purchase US dollars to service this debt. The amount of these dollar “short” positions are currently estimated to total $9 trillion.
    This tells me that the dollar is likely to remain strong for the foreseeable future. It also tells me that the borrowers of these dollars are taking significant currency risk and this in turn is risk that will be transferred to the lender if the borrower defaults.
    $9 trillion is real money and a time bomb sitting on the balance sheets of foreign banks.
    Lastly, it also means that the dollar will remain a reserve currency for quite some time because creating the banking system and the liquidity to accommodate another currency will be immensely complex.
    The important thing to remember is that currencies do not flow. Instead, credits and debits are created and destroyed.


    • Thanks for the clarification. I still disagree that “the dollar is likely to remain strong for the foreseeable future,” but perhaps it will play out that way.
      The Deviant Investor


  3. Sounds great, always does, but where was he when the dollar bottomed in 2011 and began a big bull move upwards… calling tops for touts is easy, but somehow producing a simple spreadsheet showing their previous calls and how they worked out can’t be done.


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