The theme that we are beginning to observe now as 2018 completes its first full month of trading is “actions indeed have consequences.” Since the crash of 2008 – 2009, the self-proclaimed monetary wizards at the world’s central banks have embarked upon a currency-printing spree. This is a spree the likes of which the world has never witnessed prior. And, after a delay of some years, those actions are beginning to reveal consequences. What we hypothesized precisely 12 months ago is to be a critical reversal. It is set up in the world’s reserve currency. The U.S. dollar is now confirming itself. Furthermore, promises for U.S. dollars to be paid in the future – government bonds – are showing similar long-term trend-reversal indicators.
Precisely, two weeks ago, (after three years of consolidation), the dollar has finally sliced lower through its critical 91 – 92 support zone. This is on the dollar index in no uncertain manner. A long-term top appears to have gone into place in the world’s reserve currency. So, we expect it will lead to new all-time lows by the mid-2020s.
Meanwhile, the entire complex of hard assets (commodities) continues to build one of the healthiest basing formations one could ask for on the charts. These inverse movements between the dollar and commodities are related.
All of the world’s fiat currencies as a net sum must show as simultaneously-sinking ships. (albeit at different rates). We should still emphasize the US dollar for holding a special place in world finance. Say there ever was a true flight out of the dollar and dollar-denominated assets. Since it’s the world’s reserve currency, the repercussions would be far higher than a similar flight out of the Canadian dollar. Or even the Australian dollar. Perhaps even the Euro.
Many analysts have wrongly called for a decline in the dollar over the past decade. Their fundamental approach is thus suspect in any meaningful real-world timeframe. Since 2008 the charts show no signals of a reversal in the making for the dollar. However, such messages are now appearing. Let us observe the charts. Observe them in a set of two embedded timeframes:
2017 – A False Breakout
We discuss previously over the past year the significance of a false breakout from a multi-decade high. We saw this when the U.S. dollar attempted to overcome its 100 resistance zone. Then failed to sustain the advance. Instead, it closes back below 100 within three months. When a market has advanced for many years and then fails to hold a significant consolidation breakout, this is often a multi-year trend-change signal.
A Critical Support Zone lasted for three years between 91 – 92 on the dollar index. Successive tests of the support zone saw lower lows throughout 2016 – 2017. (“cracks” in support). This is a warning sign that buyers were not as strong as suspected.
Finally, two weeks ago we observed a clear breakdown in the U.S. dollar below the lower band of the Critical Support Zone. This signal is important. For it will likely be a defining breakdown signal which will exert both positive and negative impacts on diverse markets well into the 2020s.
Note how the dollar has broken lower amidst five Federal Reserve rate hikes over the past 24 months. The mainstream media continues to relay the false message that rate hikes are favorable for the U.S. dollar. Here we see in no uncertain terms that rate hikes correspond with the most ominous reversal lower that the dollar has witnessed since the year 2001. Please continue to be wary of messages relayed by the mainstream press. They do not match the lessons we can learn from a strict examination of the markets themselves.
The Federal Reserve and other central banks only act by raising rates when they are forced to do so. Reasons include inflation expectations within the market. If the Fed could freely print money to distribute to its member banks ad infinitum and without consequence, it would do so. It only ceases this behavior when the market forces its hand. A market with a declining U.S. dollar, falling bond prices, and rising commodity prices. All of the above are now co-occurring.
Intermediate Technical Considerations
- The dollar has broken critical support. This is a confirmed reversal lower.
- Our initial target is 87 on the dollar index. (green callout). This coincides with the lower boundary of the long-term rising channel. (magenta line, lower chart). This target should be expected to show within 4-8 weeks.
- Once achieved, this first target will represent a high probability zone to coincide with a short-term top in the precious metals complex. +/- one week of time. February into early March has traditionally matched interim peaks in the metals, and it appears a similar pattern is developing in 2018.
- Upon the 87 interim targets for the U.S. dollar, we anticipate a host of analysts will proclaim the final low to be in for the dollar’s decline. They will likely point to expectations of more Fed rate hikes to come. Even though despite previous rate hikes being dollar-negative, and perhaps a reference to the lower trendline support which exists near 87.
- We anticipate the market will support these dollar-bottom calls for a period of 3-6 months. This will likely coincide with the traditional “summer doldrums” which often appear in precious metals.
- Make no mistake – 87 should represent interim support for the dollar only.
- The ramifications of a false breakout at a multi-decade high will shortly exert themselves. We expect any recovery in the dollar will not materially exceed the now-broken 91 – 92 Critical Support Zone on a weekly closing basis. The dollar should instead begin to round out over the summer. To start to decline in earnest and to break its long-term (magenta) rising trendline by late-2018.
- Our intermediate-term target will remain 81 on the dollar index. We expect it in the highest probability by late 2019. This calculates as equal to the amplitude of the consolidation above the Critical Support Zone. (103 – 92 = 11). This subtracts from the upper boundary of the said zone (92 – 11 = 81).
Declining Dollar and Falling Bonds?
We have examined in recent months the possibility of a simultaneous top forming not only in the U.S. dollar but also in U.S. long-term government bonds (Click here).
Readers should note that the 2001 – 2011 bull market in precious metals featured only a falling dollar, whereas bonds kept rising in price during the entire period.
The modern world has never seen a falling U.S. dollar and falling bond prices simultaneously. The last time that this combination occurred was in the 1970s. This was following the unsustainable spending of the Vietnam war and the simultaneous expansionary domestic policies of the U.S. government. Both the dollar and bond prices fell for nearly nine years as precious metals rose through 1980.
We are not here to engage in a political debate on the merits of various spending programs. We can say that the present situation of “perpetual” war and continuous expansion of government debt programs is strikingly similar to the past. When the position this country found itself in the later stages of the Indochina conflict. As both the dollar and bond prices fell simultaneously from 1971 – 1980, gold rose over 2,000%. Silver rose over 3,000%. This was as dollar-holders ran from paper and into hard assets.
Actions do have consequences. The Federal Reserve has printed and debased as much as it possibly could over the past ten years. Those dollars are now just beginning to search for an exit. We want to front-run the general population. By the time the average person wakes up to the theft that has taken place in front of him by the central bank, gold will already be hundreds of dollars higher than it is today.
We must know something that the average person does not know to be profitable in the markets. Does the average person know that the dollar has just broken down from a 3-year topping pattern? Or gold is simultaneously rounding out from a 6-year base? The breakdown clearly observed on the dollar chart is only the first chapter of what will be a longer-term trend developing.
Yet – Let Us Not Get Ahead of Ourselves
Markets always have a way of throwing twists our way just when we think we have everything figured out. Let us take these markets one step at a time as these movements develop.
For now, we look for the dollar to decline toward the short-term target of 87. This follows a moderate rebound into mid-year. Any dollar rebound should coincide with a final retracement in gold prices during Q1 – Q2. Which is before the 2016 peak ($1,378) is exceeded for good.
May we live in exciting times.
Bullion Exchanges Market Analyst
Christopher Aaron has been trading in the commodity and financial markets since the early 2000s. His strategy and technical analysis have helped his clients to identify both long-term market cycles and short-term opportunities for profit.
This article is a third-party analysis. It does not necessarily match the views of the Bullion Exchanges. Please do not consider this article as financial advice in any way.
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