Runaway Dollar Could Make Deflation Unstoppable

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.

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