Summary
- Volatility in foreign exchange market as investors flee euro and yen for liquid U.S. dollar.
- Euro and yen hitting multi-year lows. Inflation picking up outside US.
- US dollar seen as temporary safe haven. Could the US dollar be the next currency to decline?
- Precious metals and junior miners trading at historic discounts should be considered as an alternative to fiat currency.
- Deflations set the stage for hyper-inflations.
Over the past few months, I have seen an influx of capital and high net worth investors who are getting interested in the junior mining resource area. Now may be the worst time to panic out of the precious metals and junior mining sector into the overbought US dollar. Smart capital may be carefully looking at ways to diversify away from the euro and yen which has collapsed hitting multi-year lows. Inflation may pick up rapidly in Europe and Japan. The European Central Bank is printing euros (NYSEARCA:FXE) like crazy causing a collapse in the currency and its worst quarter in many years. This is a manipulative attempt to stimulate a weak economy and boost exports from the region.
The flight of capital from Europe and Japan (NYSEARCA:FXY) has looked for temporary liquidity in the US dollar (NYSEARCA:UUP) which is hitting three year highs as investors expect the Fed will raise interest rates by 2015. But I wouldn't count on that so quickly. Investors are also buying the S&P500 (NYSEARCA:SPY) large caps sitting on record cash positions. The US may be the most dangerous overbought market right now that could correct from those nosebleed levels delaying interest rate increase.
The US dollar has soared as a liquid alternative. For how long is the main question. Can the S&P500 continue to rally alongside the dollar? The yen and euro is collapsing. Could the US dollar be the next currency to fall or could it be the US equity markets which have gone up for three years now with no meaningful correction?
A strong US dollar could put pressure on the large US multinationals and S&P500 as US exports become more expensive. US deficits continue to soar to record levels and they must be paid with cheaper dollars.
Eventually, the large US dollar position should rotate into the commodities and natural resources as deflations set the stage for hyper-inflations.
What one must do during these periods is prepare for inflation to pick up by buying precious metals and junior miners. Deflationary periods do not last long. The long term trend favors inflation. Three to four years is already an extended period of time for a correction by historical standards.
Deflations breed the best buying opportunities as one can protect oneself ahead of the inflationary storm that may be directly ahead.
Gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) prices have been declining since 2011 but may soon bottom as the US dollar begins to test multi-year highs. The US dollar is very overbought as investors fear that the US will raise interest rates while other countries continue to print money like the ECB, Japan and China.
This rally in the US dollar should not last much longer as it may be a dead cat bounce before the next downturn. This may actually be a great time to transfer cash into real assets such as the junior miners (NYSEARCA:GDXJ) trading near multi-year lows.
The US deficit is continuing to increase especially as new wars are announced in Europe and the Middle East. The Fed will continue to support inflationary policies and prevent deflations at all costs.
Rising deficits and war are usually quite bullish for gold and bearish for the dollar. Silver is already in new four year lows trading below $18. Gold has not yet violated the $1200 mark but may soon bounce off that level. The Junior Gold Mining ETF is continuing to hold its 2014 lows.
Meanwhile, the US dollar is strong at new six year highs despite billions of dollars of bailout and quantitative easing. The Fed is running the risk of deflation and may actually be forced into more easing to boost inflation. The U.S. must pay back its record debts with cheaper dollars.
Right now, the bottles of champagne are popping in the US as real estate and equity markets continue to hit new highs. However, the piper must be paid and it is harder to pay down debts with a strong dollar. Don't be surprised to see the Fed eventually make a reverse move to devalue the dollar to pay down debts. Expect more bubbles to explode not just in 3-D printing, but in social media stocks and get rich quick real estate scams.
There is a huge cash position waiting on the sidelines to buy real money such as gold and silver especially from the Europeans right now dealing with a currency on verge of collapse and China, which just announced a new Shanghai Gold Exchange. Major institutions are sitting on large amounts of US dollars/bonds and must transfer that into the form of real money in the form of gold, silver and ounces in the ground controlled by the junior miners.
Look for huge volume and accumulation in gold and silver over the next few weeks and in some high quality junior mining stocks. Negative capitulation followed by strong accumulation could be the indicator that the smart money expects gold and silver to bottom. The question for many is when this will occur. It should be soon as this correction in the junior miners has been one of the worst and longest in decades providing possibly a once in a generation buying opportunity.
