Tracking the Milestones in the Collapse of the Dollar

Simit Patel · 05-25-2009, 11:58 AM

The case for a severe weakening , and perhaps even total collapse , of the US dollar is something I 've been making for some time on my blog. As the dollar has begun experiencing some deeper bouts of weakness and has given back all of its gains since October 2008 , I wanted to step back and take a big picture look at where we are on the path to dollar collapse -- and re -evaluate whether or not we will stay on this path .

The first big picture event we should look at is the price of gold . A new bull market in gold began in 2001 . This is a long -term trend , I believe the next leg of this trend will start shortly .

The second big picture event worth noting is the collapse of the US stock market in 2008 , particularly the second half of the year . Remember there are two sides to a currency crisis : (1 ) an overproduction of supply of the currency and (2 ) a loss of confidence and demand for the currency . The Federal Reserve 's monetary policy is , in my opinion , the primary contributor to the oversupply of currency , and the corresponding price inflation /currency weakness we 've seen over the past decade . The stock market collapse reflects a weaker demand for US financial assets , and thus a weaker demand for the US dollar -- particularly when one considers that the finance industry is a major component of the US economy .

At this point , we should ask ourselves if these trends have reversed : has monetary policy sought to tighten money supply ? And has the US economy repaired its banking sector ? In my opinion , the answer to those questions is no . Bernanke is firmly committed to inflation as a monetary policy , and the Obama -led stimulus packages has already resulted in an increase in broad measures money supply like MZM. So fundamentally , I think we 're still on the track to dollar devaluation .

Recent Milestones in Treasury Bonds and the Dollar

There are two milestones which recently occurred which suggest the US dollar devaluation trend may be set to accelerate . Those trends are :

1 . Treasury yields have spiked sharply. This suggests bond buyers are now demanding a greater rate of return on the money they lend . The reason for this , in my opinion , is concerns regarding a weaker dollar in the near future .

2 . UUP , the ETF which tracks the US dollar index , is on the verge of breaking a major support level . See the chart below .

Trading This Environment

My trading outlook remains the same , in that dollar devaluation is the primary trend , and that it is here . I favor buying precious metals , commodities , and commodity currencies . I favor shorting the US dollar and US Treasury bonds . At this point , I view it as a relatively safe bet that long gold /short long -term Treasury bonds will likely end up as the trade of the year .

Disclosure: Long gold, silver, and Canadian dollars. Short US dollar.

Visit my store on InformedTrades to find products and services I recommend .

05-29-2009, 05:48 PM

everything said in the headline of my comment . thx for the TPI thread . will follow you , you on twitter ?

Simit Patel · 05-31-2009, 10:52 AM

hey prudentinvestor ,

yes , you can follow me on twitter at simitpatel (simitpatel) on Twitter

thanks
simit

Tekmnd · 05-31-2009, 11:59 AM

Hi Simit

What about the possibility of the dollar getting a short term rally if GM goes bankrupt ? Perhaps it could create a short term flight to safety causing the USD to spike back up . Any thoughts ?

Cheers
Tek

Simit Patel · 05-31-2009, 12:35 PM

hey tek ,

certainly possible , although this past week we saw days where all dollar -denominated assets sold off ; stocks , treasury bonds , and the dollar . i think increasingly we will see precious metals be the safe haven of choice .

Tekmnd · 05-31-2009, 01:12 PM

Hi again
I bought 2 silver coins for my daughter for Christmas to try and teach her about trading /investing (she is 8 ). The price was $10 .26 . A couple of days later , I placed my covered call trade on USO that I have the ongoing thread on . I debated between USO and SLV (the silver ETF ). Sure wish I had chosen SLV - it is up almost 50 % since then .

I am surprised that , while gold is discussed in the media daily , the run up of silver has been for the most part ignored .

Cheers
Tek

jaro g. · 05-31-2009, 05:40 PM

hi tek ,

let 's hope the major media will ignore silver even longer and let 's load up with it till then :-)

btw , was the x -mas gift for yr daughter an 1 oz silver coin ? why ? i 've bought few 1 oz silver coins last november in germany for €11 .50 and the dealers charge €14 today (yes , for small coins there is a huuuuge 25 %-50 % spread to comex 's paper silver price )

thx ,
jaro .

Tekmnd · 05-31-2009, 06:30 PM

Hi Jaro

Yes , two 1 oz silver coins . I paid $2 over spot to buy them (Meaning I paid $12 .26 when the price was $10 .26 ).
She is only 8 and I figured 1oz silver coins would be easy for her to understand . I only bought 2 of them anyway .

Cheers
Tek

Airelon · 05-31-2009, 10:01 PM

And what will you do on this supposed &quot ;collapse of the dollar &quot ; when the United States does for the Dollar , exactly what England did for the Pound - when the Pound was in a more dire situation than the Dollar is now ?

As England demonstrated - a central bank will sacrifice an entire economy for a decade , rather than commit suicide . And if they allow total collapse - then they are cutting their own throat .

Collapse ? It 's not going to happen.

I 'm almost to the point that I believe that hyper -inflationists are either a ) severely misinformed as to basic principles of economics , or b ) perpetrating a scam .

jaro g. · 06-01-2009, 06:32 AM

hi tek ,

thx 4 your answer ; paying just 20 % above the comex price is not much for 1 oz silver coins . in germany was the spread much higher (40 -50 %), today is the spread about +25 %. november was was prolly the time after the stock and commodity markets plunged and no one wanted to sell physical stuff so cheap

)

Quote:

Originally Posted by Tekmnd

Hi Jaro

Yes , two 1 oz silver coins . I paid $2 over spot to buy them (Meaning I paid $12 .26 when the price was $10 .26 ).
She is only 8 and I figured 1oz silver coins would be easy for her to understand . I only bought 2 of them anyway .

Cheers
Tek

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