The elusive US Dollar rampage, so anticipated by the "deflation" community, will have to wait a while longer. Gold and gold stocks have been leading most markets that don't call themselves USD, higher. While the chart of gold itself is bullish with some short term caveats (slight bearish divergence on some indicators) in play, the daily, weekly and monthly charts of the HUI gold miner index look hysterically bullish. Much to the shorts' chagrin, it looks like the broad markets are about to follow the miners higher, although I will be surprised if the rise is anything but a pale shadow of the what the miners have done recently.

To briefly summarize the market environment into year end, we see a then-bullish dollar trade, which celebrated its one year anniversary. There was also a growing unease in Goldbugville as very public top callers came out of the woodwork (including this writer in a back handed way - see 12/18/05 quote below). The crude oil market was playing possum and the Euro was universally despised. Finally, there was manic-depressive behavior on Wall Street as the VIX spiked into year end and the much-hyped Santa Claus rally pooped out after the predictable October crash alerts were debunked.

So where does that leave us as we enter the second week of trading in 2006? Bullish. Bullish gold, bullish miners, bullish commodities, bullish energy, bullish alternative energy, bullish tech, bullish the Euro. Simply bullish anything not called "US Dollar", with the gold and silver miners playing the starring role. We call this a blow-off folks. Or perhaps a mark-up phase, or mini mania. Whatever it is, it is happening now, in real time, and there are a lot of people sitting sidelines, in cash, having top-called various asset classes. That money must now make a decision. "Is it real or is it Memorex?"

For the record, I bit my tongue and held core miners (in the undervalued junior sector which is now exploding), while trading around certain positions for risk and cash management reasons. But I felt a growing personal bullishness in a December sans Santa in tech and the broad markets, along with foreign currencies (where exposure was increased to quality global government bond funds). The lack of a Santa rally simply felt like a set-up. While the charts told me oil might continue to drop, what I have witnessed in the American manufacturing sector told me that the productive economy was gaining power, and that would help create renewed pressure on the price of oil and a resulting rebound in energy and alternative energy stocks.

From "Monthly Minders" dated 12/18/05: "Although bearish newsletter writers don't want to hear it, the US manufacturing sector is currently booming, and by all personal anecdotal evidence, much more so than official ISM figures have thus far indicated. Machine tools cannot be kept in stock. Raw materials such as copper, brass and aluminum are flying off the shelves, but not for hoarding. They are being fashioned into end products. This is our fundamental reason for being bullish oil (however tentatively at the moment) and paper goldbugs should remember that higher oil will be decidedly not good for miners' bottom lines unless gold goes orbital. Metal goldbugs don't worry about such things."

As an American manufacturing person, I would like to explore the roots of what is going on in the US' heretofore most ignominious sector. That will come later, as we gain more information on whether it too is "real or is it Memorex?". I am extremely pleased with the sector's performance of late as well as my precious metal, uranium, alternative energy, tech and global bond holdings. But let's return to the title theme of this article. Let's see what the buck has up its sleeve.

Presented are three views; Daily, weekly and monthly. The charts become progressively more bullish as the focus is dialed out from short term to longer term. There is debate among the bulls as to the longevity of the current multi-market rallies (I fall into the short term bullish, intermediate and/or longer term bearish category because, like many analysts I respect and follow, I don't think inflation of money aggregates is anything but a ponzi-dynamic disaster in waiting). The fate of the dollar should be instructive going forward. On the biiwii site, the dollar has been referred to as "junk" and "intrinsically worthless" on several occasions, but that does not mean its price can not go up at any given time. I remain open to the possibility that we may go straight into hyperinflation (do we even remember the concept of sacrificing now so that future generations may have a fighting chance economically or has the hubris and denial become so thick that we believe all our assets will simply gain in value just because?). But if that happens, your stocks (including gold stocks) are not going to be worth a hill of beans when it's all said and done.

Without further delay, the charts:

The buck looks bearish on the daily with a desperate effort to hold above the 200DMA in the face of momentum and strength indicators digging for China, and a Fed that is making noises about an end to its rate hiking (and dollar supporting) regime.

The weekly chart shows some improvement in the indicators with a break of a bearish rising wedge and more support still well south of here.

It is on the monthly chart that we get the clearest view of the argument that the dollar may not yet be done on the upside in its bear market rally. All indicators remain bullish and appear simply to be correcting a bit. RSI and MACD remain in a strong bullish divergence beyond the short to intermediate term. The dollar's price potential is not dead despite the mind boggling debt it denominates, Fed rate policy speculation and assets of all classes rising as if the buck is setting its sights on new multi-decade lows.

Of course these indicators may be just beginning to roll over, in which case it would mean hell on earth for dollar holders. It would also mean an increase in inflation pressure to such a degree that the pretense that this is a healthy component of the financial and economic system would be stripped away. That would not inspire confidence in any paper assets. But it might well inspire a 4-digit gold price.

Bottom line: We are in the midst of a grand economic experiment. It has been in progress for nearly a century. As modern man tries to control his fate and attain the ideal of an ever rising tide, there are risks and pressure building. The dollar, being the world reserve currency of the last great superpower is one of the barometers used to gauge that pressure. Gold is another. Bulls may enjoy their rising commodity, stock and foreign bond assets, but in the end, the utter debasement of the dollar would be a disaster for all Americans and likely a good part of the rest of the world. I have never lived through a hyperinflation, but my guess is that in the initial stages, it feels mighty good seeing asset prices rise.

But America's strength lies in its currency, and a fall from superpower status would be akin to slipping on a banana peel. People cheering all assets higher and the dollar lower should realize that the gains are coming at a price, and with the trillions upon trillions in collective US debt, the dollar simply cannot afford to pay that price.

Banana Republic Flag courtesy sodipodi.com

My plan will be to watch the asset markets day to day, week to week and month to month. Allocations remain positioned for a dollar decline and stock market rise in the short term, but I will remain alert to subtle changes in market technicals as well as macroeconomic fundamentals that may hint at a change to the bullish picture. A bearish signal would be a firming of the dollar against all the odds currently arrayed against it.

Meanwhile, various markets look set to go bananas.