You would think that after an unprecedented nine-month run higher without a pullback, the most extreme overbought levels ever recorded in the currency, and rampant pervasive bullishness would be enough reasons to be cautious on buying something. Not for CNBC viewers and the U.S. dollar though! According to this poll on CNBC’s website 80% of those polled expect the dollar to hit parity with the Euro either in March or by June, and 90% expect parity sometime this year.
The fact is the U.S. dollar looks like silver in 2011, Bitcoin in November 2013, or 3D printing stocks in late 2013, or maybe oil in 2008. Or numerous other parabolic charts I could go on and on listing. It looks like a terrifying parabola that is going to crush those late to the party. The other two parabolic surges in the dollar were destroyed after they topped, and this parabola looks far worse. In my view if you’re still bullish on the dollar here you are ignorant of all parabolas ever recorded in the history of the markets and you need to check into parabola rehab before you get yourself into serious trouble.
If you would have told a silver bull in April 2011 or a gold bull in September 2011 where gold and silver would be trading now they would probably laugh at you and shake their head. Yet that is the reality of the markets and how drastic things can change when bull markets and bear markets end.
As far as the U.S. dollar goes, I think we are approaching a major top to its multi-year bull market. And its quite ironic because the media has not been this bullish on the U.S. dollar in perhaps 15 years, at least I can’t remember them being this bullish on the dollar since the turn of the century.
In this weekly chart of the dollar you can see that the dollar put in a major bottom in 2008, right when everyone hated it the most. Then it had two significant rallies and declines heading into 2011, which was another period of time where dollar bears were very vocal. I remember specifically in mid-2011 when a Bernanke speech was supposed to send the dollar off a cliff. Instead it turned out to be a major bottom for the dollar.
Right now we are in the middle of perhaps one of the most extreme moves in the currency markets we might see for a long time. But underneath it all we have to acknowledge that this dollar bull is old, it’s been around since 2008 on a longer term basis and since 2011 on a shorter term basis.
This parabolic top in the dollar which is likely the end of this bull market has major implications for gold investors as gold is now in position to take over leadership of the markets. Bonds, stocks, and cash have now all experienced multi-year bull markets and each one of those is overvalued and is in danger of money looking for the exits. Of the three I think the stock bull market has the potential to go on for a while longer, maybe even a year or so, but fortunes will be made buying cheap and unloved gold stocks pretty soon. It’s almost like the rest of the markets have baked themselves into a corner and the refuge will be the undervalued markets, of which gold is the king right now.
This isn’t 2008. Those that are expecting fireworks for the U.S. dollar if this bear market continues are in for a rude awakening. The setup for the dollar is completely opposite to what happened leading into it’s mega run in 2008. Let me explain.
The dollar was approaching a 3 year bear market heading into late 2008 as the stock market was beginning to crash. And the bears were out in full force proclaiming the death of the dollar right at the bottom. Being a dollar bull at that time in 2008 was totally contrarian after a 6 year overall bear market in the dollar, but it was the exactly right position to take.
This time the dollar has been going up for 3+ years, and is actually late in a cyclical bull market and ready for a top. Sentiment is dollar bullish now after the dollar has not made a major new low for 6 years since 2008. Discussion of King Dollar being back has been all over the Internet recently when it made a big surge higher. In reality it’s more likely the dollar is overdue for a major top and could be headed for a new bear market shortly.
Some might say that the big surge higher in the dollar recently is proof that the dollar is ready for a new bull market. The problem with that narrative though is the fact that markets tend to make false moves before they make big trend changes, as they fool people right at the end of their move. Two examples of this were what happened with gold and oil in 2007 into 2008 as the stock market transitioned into a bear market.
Gold and oil actually bucked the trend of the stock market and went higher into 2008 as stocks had already topped. And they didn’t just make minor moves higher, they made big moves higher with oil making a crazy parabolic spike higher right before stocks got crushed. So there is precedent for extreme false moves right before bear markets begin and I think it’s quite possible what we just witnessed in the dollar was another example of this.
The story for gold right now is very similar to what happened with the dollar in 2008. Everyone is bearish at the bottom after a 3+ year cyclical bear market, and nobody expects a major move higher. Market participants are actually positioned for the exact opposite thing to occur in a big way. Small speculators in the futures markets were recently the most net short they’ve been of gold in the last 13 years! Gold is actually overdue to start a bull market and take everyone by surprise just like the dollar did in 2008.