Just how significant is the 80 level on the Dollar Index?

Take a look, you decide?

Chart 1 - US Dollar Index looking over the abyss

Gulp!

The Dollar Index (a trade weighted index of the US Dollar vs. other major currencies) is dangling off a cliff.

There is nothing but fresh air under 80. Never in the history of the currency has it been breached. Some say that the composition of the index has changed and based on the old weightings it would already be underwater. Ok, maybe so. But traders act on the charts and the above chart is saying that 80 may have been tested one time too many and may very well fall.

In intermarket parlance there is a positive correlation between Bond Prices and the US Dollar. That is, if the Dollar moves lower, Bonds move lower (interest rates higher). Simple to trade you say? Aaahh but there’s a catch. There is a significant and changing time lag to account for. The Dollar above made its recent highs around 2002. Interest rates only made their ultimate lows in mid-2003.

As time moves on, a continued deterioration in the Dollar will pull interest rates much higher (despite the shenanigans of Asian Central Banks recycling Dollars into US Bonds and keeping rates artificially low). Market forces ultimately win out and the trend is now definitively towards higher interest rates.

The counter balance for paper financial assets such as the Dollar and Bonds is real tangible assets. Preferably one’s that are not debt financed (Real Estate) and not economically sensitive (Oil and Industrial Metals) and that leaves our favourite – Gold!

Gold’s major use is as an investment vehicle with a AAA+ credit rating – Gold Bullion that is. Gold is best viewed as the anti-Dollar or a foreign currency with no sovereign home and whose supply cannot be manipulated by the dangerous whims of politicians.

Sometimes it pays to disregard the gold price today and focus on the one incontrovertible truth. Gold is in its biggest Bull market in over 20 years because the US Dollar is mired in a secular bear market period.


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