Gold bugs have been anticipating a dollar crisis for quite some time. While a full scale collapse has yet to materialize, the dollar has lost significant value against most other assets in the past decade. But in recent years, the dollar has held up remarkably well against other currencies.
The U.S. Dollar Index is a measure of the value of the U.S. dollar relative to its most significant trading partners. More specifically, the USD index is calculated by factoring the exchange rates of six major world currencies: the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc. This index started in 1973 with a base of 100 and is relative to this base. This means that a value of 120 would suggest that the U.S. dollar experienced a 20% increase in value over the time period. The current value of 80 suggests the opposite, a 20% decrease in value.
The dollar has been in a bear trend since the start of 2002, losing significant value in the years following the 9/11 attacks. In fact, the dollar index lost nearly half of its value, dropping from 120 towards 70. But since 2009, the dollar has been consolidating within an increasingly tighter range. This action has created a symmetrical triangle pattern over the last six years, with the USD straddling the 80 level.
The symmetrical triangle is a continuation pattern that signals a period of consolidation in a trend followed by a resumption of the prior trend. In this case, we can forecast a resumption of the downtrend that has been in place since 2002.
Zooming in a bit, we can see the significance of support around the 79.20 level. This support has held up on five separate occasions since late 2012.
The current downtrend has been in place for well over a year and the USD has fallen through support at USD 80 once again. This fact alone is not technically significant, as the USD has fallen below 80 on multiple occasions in the past few years.
What is different this time is the series of lower lows in place since December of last year. If this trend continues on the current decline, the USD will drop below 79.20 for the first time in nearly two years. This could pave the way for a deeper decline below the 76 level, which would signal a continuation of the downtrend that started in 2002.
Backing up this technical forecast are fundamental factors that have grown increasingly bearish for the U.S. dollar in the past year. Much of the world is turning away from the dollar in international trade, preferring bilateral trade agreements in local currencies. This includes the BRICS nations, which represent over 20% of global GDP.
Most recently, it was the announcement of a high-profile deal by Gazprom, the Russian state-backed gas giant, which signed a $400 billion, 30-year deal to supply gas to China. Russia’s pivot East, has the potential to further undercut the domination of the U.S. currency.
As global demand for dollars declines, other currencies stand to benefit. But the biggest benefactor will be real money, gold and silver, which have been breaking out recently and have plenty of upside remaining. Those seeking maximum gains may also want to consider owning shares in the companies that mine these appreciating assets. The best-in-breed mining stocks are likely to offer significant leverage to the increase in the gold and silver price going forward.
The gold bull just finished an extended slumber and looks ready to make another run higher. Whether this move takes gold to our technical price target of $3,600 or John William’s inflation-adjusted forecast of $8,890 remains to be seen. More importantly than how gold performs priced in fiat money, is how gold performs against other real assets. We believe gold will not only protect you from the inflation that has recently spiked higher, but will vastly increase your purchasing power over time.
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