Bullion bulls needn’t fear a resurgent dollar
by Rick Ackerman
Posted originally November 16, 2010
TIME FOR A REALITY CHECK IN BULLION – AND IN THE DOLLAR while we’re at it – since anxiety about the price action in both seems to be rampant these days. The latter, as represented by the NYBOT Dollar Index, exceeded a bullish trigger price of ours yesterday by 0.02 points, causing some gnashing of teeth in the Rick’s Picks chat room. Gold and silver investments are quite popular in this forum, to put it mildly, and signs of strength in the dollar, however faint, are usually seen as threatening.
Before we get upset about the prospect of a resurgent greenback, however, let’s consider why it has been rallying in the first place. Quite obviously, this has been a response to rumblings in Europe, where Ireland and Portugal have recently re-emerged as the financial basket-cases-of-the-month. We’ve seen this movie before, though, and that’s probably why the U.S. dollar’s upward adjustment has been relatively muted this time around.
There are other reasons as well. For even in a financial world that has been steeping for far too long in a fatally toxic brew of delusion, stupidity and moral blindness, and in which, each day, cosmic quantities of Other People’s Money (OPM) are deployed in sham markets with wanton recklessness, the flight-to-safety story was becoming a difficult sell.
Some of you may recall that the word “safety” was once used interchangeably with “quality,” as in “flight-to-quality,” when referring to the sandpiper-like shifting of global liquidity into dollar assets, most significantly Treasurys. Nowadays, though, the word “quality” is rarely used in connection with the dollar because it would be an affront even to the village idiot’s intelligence – to Tim Geithner’s intelligence, for all we know.
Those PIIGS Again…
Not that such considerations would altogether discourage the OPM crowd from reflexively leaping back into dollars whenever Fitch’s says a discouraging word or two about the PIIGS. And leapt they have, but to what effect? In fact, the dollar’s rally has been unimpressive so far. It did register a bullish “impulse leg” yesterday on the daily chart (shown above), but the process has been one of accretion.
If the dollar’s current rally were destined for greatness, we should have expected it to come storming out of the gate – especially since the buck must be presumed spring-loaded due to a massive carry-trade that has effectively put the world’s financiers on the short side of the dollar.
If the rally should continue for perhaps a short while longer, however, we would suggest that bullion bulls keep their cool by reminding themselves of the U.S. Treasury’s need to borrow at least $800 billion over the next six months. And if that doesn’t seem scary enough – which is to say, bullish enough for gold and silver — consider that it implies a $1.6 trillion annualized rate of debt expansion, all of it funny money.
Contrasted with the recent emergence of pan-European, half-hearted austerity dictated by Germany, if not by penury itself, it is hard to imagine what currencies, in the months to come, the U.S. dollar would be rising against in the febrile minds of bulls.