As counter-intuitive as it may seem to many, I believe the world-wide desirability to own the much, maligned U.S. Dollar is destined to rise. To my mind, the recent upside break-out of the U.S Dollar Index is a major event and confirms my belief. It is driven by conditions existing beyond the borders of the United States that are destined to worsen. The result will be the flight of large sums of foreign capital to the U.S. and the dollar. This will likely be a temporary phenomenon, but its effect will be widely felt.
There are numerous reasons that would lead one to expect a weaker dollar. Yet, reality overwhelms what we may or want to believe! In this case, the United States is in better financial and economic condition than most other major countries. This positions the U.S Dollar to become more desirable to many foreigners, than their own currencies. The economic, political, and social problems facing the other important nations are currently far more serious than those we are experiencing on American soil. All that is needed is a triggering event to set into motion massive currency flows to the dollar.
Japan has joined the E.U. and others. It has embarked upon yet another period of monetary easing in their effort to improve their economy. If they fail, the consequences can be damaging on many fronts. Numerous European banks are questionably solvent and a banking crisis may be unavoidable. Italy just announced it will bail out one of its largest banks, Monte dei Paschi di Siena. Both houses agreed to use 20 billion euros to save its banking industry. One must wonder from where they will get the money, and if that is enough. India's government cancelled their 500 and 1,000 rupee banknotes, and severely limited gold ownership for its citizens. They instituted these changes allegedly to fight corruption. However, these actions may lead to a global trend as country after country will likely initiate these or other acts to achieve at least two goals. The first is to punish those who are hiding untaxed money from them. The second is to accumulate gold, possibly with the intent to use it for future backing of their currencies.
The greater problems lie with the fate of the European Union itself and the euro
The Schengen Agreement is creating enormous strains between E.U. countries. Policies dictated by Brussels are angering the citizens of many of their member nations. Euro-skepticism is greatly on the rise. These and other factors are causing the E.U. to become less cohesive. This is further exacerbated with Great Britain's leaving the Eurozone.
If the E.U. breaks up, which is likely inevitable, the fate and value of the euro are likewise destined to collapse. Greece is struggling to financially survive. Italy is installing yet another government. This coincided with the failed referendum that former Prime Minister Matteo Renzi supported to increase his power. In truth, I believe it was also the result of a backlash to Renzi's effort to bring his nation's policies into alignment with those mandated by Brussels.
Everywhere, the distrust of government motives appears to be mounting. This causes the citizens of countless nations to question the wisdom of solely holding their domestic currencies. As the inhabitants of more and more countries begin to doubt the future of their homelands and the value of their banknotes, they are beginning to look elsewhere for safety. And as conditions further deteriorate in those lands, the desirability of the dollar will increase.
Presently, a rising number of the world's citizens are recognizing their country's financial and social conditions are continuing to erode, and their government's policies are becoming harsher towards those they govern. They are becoming frightened for their future and are beginning to move money offshore. I believe this is the real reason underlying the dollar's upward trend. As time passes and the above conditions continue to grow worse, the trickle of capital flowing into the U.S. to purchase dollars will become a torrent.
For a time, the U.S. will be widely recognized as the safest place to hold one's assets. We are now experiencing a subtle move into higher territory with the U.S. Dollar Index breaking through the 100 area. It is emerging from a massive bottom formation that was a dozen years in the making. If I am correct, later the dollar will sharply rise.
Gold is currently among those assets receiving the brunt of damage from the advancing dollar. The eternal metal will one day again shine. However, given my belief that its current Bear Market has not fully run its course, we must wait until the gold bear breathes his last, and a new secular Bull Market emerges. Further, the dollar's strength is giving traders ample reason to sell or short the metal at every opportunity, which further depresses its price.
Eventually, I believe gold will join the dollar's Bull Market, but will later separate and leave it in the dust
True, this will be one of the few times in history when both gold and the US. Dollar move together. But, this will only occur after gold finds its Bear Market nadir. When this point is marked, I expect simultaneously higher prices for both markets.
I suspect that after gold's Bear Market ends, much capital will shortly thereafter begin flowing into it. A "V" shaped or brief bottom is likely when citizens of the world again seek the safety of the eternal metal. As the problems in the European Union and elsewhere erupt, similar conditions will surface in the U.S. that can no longer remain papered over, buried or ignored. The dollar's short-term desirability will evaporate, and the only remaining asset offering time honored safety will be gold. Then, the dollar will begin to decline as it joins the other currencies seeking the yellow metal. When that occurs, a move to new, all-time high prices for gold will likely follow.