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.
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