The Almighty Dollar - Revisited
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, January 2, 2017.
Donald Trump is elected President of the United States of America last year on a populist platform and the dollar($) takes off like it's nobody's business on the sales pitch America is back in business with a true business man at the helm. Right-wingers would point out Trump's failures throughout the years in an effort to dispel this belief, however in fact his track record is impressive, with only four bankruptcies out of some 400 incorporations. Make no mistake folks, that's an incredible feat with aggregate failure rates so much higher. So it's no wonder both the American people and foreigners are optimistic about future prospects for the States with such a good manager now in charge, where he's already embarrassing Obama before he's even taken office on his way to creating the 25 million new jobs he has pledged.
Donald Trump is elected President of the United States of America last year on a populist platform and the dollar($) takes off like it's nobody's business on the platform America is back in business with a true business man at the helm. Right-wingers would point out Trump's failures throughout the years in an effort to dispel this belief, however in fact his track record is impressive, with only four bankruptcies out of some 400 incorporations. Make no mistake folks, that's an incredible feat with aggregate failure rates so much higher. So it's no wonder both the American people and foreigners are optimistic about future prospects for the States with such a good manager now in charge, where he's already embarrassing Obama before he's even taken office on his way to creating the 25 million new jobs he has pledged.
So Donald Trump looks to be ‘good news' for America with all of his energy and plans for the future, and the financial markets have been quick to reflect this belief - the bankers grabbed onto it right away as it suited their needs as an excuse to jam stocks higher into year-end. In this regard, it should be noted stocks have not rallied like this post election since the days of Hoover in 1928, adding some $2 trillion globally. (i.e. and we know what came after that.) What's more, US debt credit risk spreads have also improved, however this has been at the expense of an approximate $2 trillion in fixed income losses globally, which likely hurt the average investor more than stock markets gains helped because asset heavy aging populations have been selling stocks in favor of bonds for years.
Furthermore, and surprisingly to many, it's likely the unintended consequences of Trump's economic surge will continue in the years to come, which could make the totality of all his efforts a highly ironic, tragic, and unexpected in the end. Case in point - the $ - The Almighty Dollar. The purveyor of US colonial dominance and economic dominance around what has become America's unipolar world as the $ has become ‘the hegemony', with the petrodollar pillar the primary support holding up the now multi-quadrillion $ derivatives Tower of Babel. So the question then arises, ‘what if all this changes at the same time domestic degradation at home necessitates more money printing, or face an uprising - because if Trump doesn't deliver on his promises to the plebs - there will be trouble'.
Of course if Trump does deliver, as alluded to above, there will be trouble as well, especially if he plans to pay for keeping all these promises with money printing. Because it will take unprecedented amounts of money printing in order to make America great again on this basis. So the key to understanding what is coming because all of this is captured with the catch-phrase ‘unintended consequences', with the most damaging unanticipated outcome possible being hyperinflation, a very real risk if the velocity of money is impacted by the combination of money printing, improving labor markets, and reams of unwanted $'s coming home from abroad due to an increasingly decentralizing world no longer in need of $'s to pay for things at home.
Putting America first (another Trump catch-phrase), manifested in protectionist policies with its trading partners, is yet another possible unintended outcome of attempting to impose such policy on the world right when many foreign states are striving for increasing independence (think China, Russia, etc.), which could be big trouble for America moving forward - big trouble for the almighty dollar. You will remember from my recent comments on the $ regarding it's technical outlook, that while there's likely more rally dead ahead for the greenback as we move into 2017 off the ‘Trump Effect', it would not be surprising if the count presented in the monthly plot below turns out to be accurate, with big downside possible thereafter as the world accelerates it's abandonment of the $ standard. (See Figure 1)
So don't be surprised when increasing regionalization and responses to US protectionism eventually takes over as the primary drivers of the $ at some point over the next year or so, reversing the excitement associated with the Trump Effect rally currently under way. In a world likely to be subject to machine gun like unintended consequences as a result of accelerating geopolitical economic war in coming days is likely to best characterize a global political landscape that will be subject to increasing volatility as the serial bubbles fostered since 2008 are finally popped - creating an environment where risk taking is shunned - and ‘safety' is sought. Does this mean both the $ and it's alternatives, with gold and silver at center, can rise at the same time? One things for sure, if gold can retake $1300 it's a possibility, however I wouldn't hold your breath (or bet the farm) on such an outcome just yet. (See Figure 2)
Above you have the S&P 500 (SPX) / Gold Ratio (SGR), which as you can see, is now approaching significant resistance at the monthly 200 period - exponential moving average (EMA), which is turned lower and should act as very strong resistance. So, in effect, gold now effectively will soon have a wind at its back because of this, even if the SGR does volley above this important resistance in order to mark a 38.2% retrace, which is exactly what will likely happen this year. So while not right away, at some point this year, gold should find a new source of liquidity from money coming out of the stock market, where being such a small market, even including all the derivatives, should have a noticeable impact on the entire sector - especially bullion - which is in reality in much tighter supply than derivatives influenced pricing would lead the naked eye to believe.
To answer the question can both the $ and gold move higher at the same time on a ‘safe haven' bid, while nobody knows for sure, what is for sure is that from a technical inter-market perspective, ignoring bond market considerations, etc., at some point in 2017 gold (precious metals) will have a tremendously strong driver transition in its favor, as suggested in the above chart, which should have a material impact on its pricing - derivatives games or not - and you know the story there. Again in this regard, while we still need to see the reckless hedge funds that play in Comex silver killed, once this occurs, the baffles will be cleared in this respect (true sentiment wise), putting a potentially completed larger degree a - b - c corrective affairs in both gold and silver in place, with the only important question being how far down they must fall in order to reach a pain point sufficient to engender sustainable reversals. (See Figure 3)
So again, with bubbles bursting everywhere these days, it's not a stretch to speculate a continuation of ‘safe haven' $ buying will continue into the New Year, however for reasons outlined directly above, there is also reason to think this trend will exhaust itself at some point as well. Foreigners who were dumb enough to borrow in $'s are getting squeezed right now (due to currency exchange), and at some point they will scream uncle, however with global stock markets holding up at present, no panic is in motion just yet. This will change however, where you will know the larger move for the $ is coming to an end once global stocks roll over, and efforts are made to reduce this credit. This is when the $ will blow-off, which is not yet. This is the sequence you want to wait for if contemplating speculating on the turn back higher in precious metals, because prices could be much lower than present levels as a panic is likely witnessed.
In terms of annotations in Figure 3 then, don't be surprised if gold does in fact penetrate the ‘trend definer' this trip down then, as gold likely needs to penetrate the large round number at $1,000 in reaction to all this, which will wake a few people up - hopefully the idiot hedge fund permabulls over at Comex. As you would know in reading these pages on a regular basis, for the most part these are the bad guys that are responsible for the dire market conditions in precious metals irrespective of any efforts by officialdom to control prices, just because of their psycho betting practices in the derivatives markets. Again, not only do they not buy the actual metals to create bona fide demand, because they are working with other people's money (meaning they gamble recklessly), as with Einstein's definition of insanity, their desire to reach Elysium with Warren Buffett and Bill Gates keeps them coming back month after month, year after year, attempting to hit a ‘home run' in silver.
As discussed in our last commentary, that's why these knuckleheads keep coming back for more in Comex silver contracts, calls on those contracts, and calls on the leveraged ETF's as well. This is the reason precious metals are going nowhere until this stupidity changes, which will not be the case until either these people begin to believe precious metals are going down (declining stock markets will conjure visions of deflation), or they simply go broke once their investors lose enough money and pull whatever capital they have remaining. Again however, this is not occurring yet because the losses associated with precious metals are being masked by gains from other sectors (in macro funds), which is why the broads will need to turn lower as well in order to create absolute losses for investors, causing them to redeem. And again, this is the dynamic necessary for the $ to blow off as well - so it all ties together.
See you next time.