Dollar Teetering On the Abyss
Commodities could be poised for a huge surge higher during the next two years as the dollar deteriorates.
I've marked the major three-year cycle bottoms in both the CRB Index and the US Dollar Index on the chart below with blue arrows. (Actually the CRB cycle tends to run about two and half years on average.)
Click to enlarge
The dollar is now at great risk of forming a left translated three-year cycle. A break below the October 27 intraday low would initiate a pattern of lower lows and lower highs of an intermediate degree. When the intermediate cycles start to roll over that is usually a sign that a major cycle has topped. If the dollar's three-year cycle has topped after only five months, we will be at great risk of a severe currency crisis in the fall of 2014 when the next three-year cycle low is due. Even more concerning is if the CRB cycle has bottomed. If it has, then commodities are poised for a huge surge higher during the next two years as the dollar deteriorates.
The next couple of weeks are going to be critical for the dollar. Sometime in the next two weeks the dollar is going to drop down into its next daily cycle bottom. On average that cycle lasts about 20 to 25 days. Monday will be the 12th day of the cycle. The reversal last Thursday has the potential to mark the daily cycle top. If that top holds then the dollar is at great risk of moving below the October 27 intraday bottom sometime in the next two weeks as it moves down into its next daily cycle low.
Click to enlarge
The dollar must hold above the October 27 low. Failure to do so would indicate that the cancer has now infected the currency markets, most specifically the US dollar. A penetration of the October 27 low would indicate that the current intermediate cycle topped in only two weeks. That should potentially lead to another 15 to 20 weeks of generally lower prices on the dollar index with the next intermediate degree bottom due sometime in early to mid March.
If that scenario plays out, we are almost certainly going to see the CRB break its down trend line, confirming a major three-year cycle bottom has been formed.
Click to enlarge
The extremely mild nature of the decline so far is a serious warning sign that quantitative easing 1 and 2 are going to eventually trigger massive commodity inflation.
At this point all we can do is hope that the three-year cycle in the CRB will stretch slightly long and bottom early next year. If it fails to do so, and the major three-year cycle low did occur in October, then we have some serious inflation heading our way in the next two years.
More importantly to precious metal investors, if the dollar's three-year cycle has already topped, then there is a very strong possibility that the next two years, as the dollar collapses down into its 2014 bottom, will drive the bubble phase in the gold bull market.
Editor's Note: Toby Connor is the author of Gold Scents, a financial blog with a special emphasis on the gold secular bull market.
Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter