The U.S. dollar started off the New Year on the wrong foot – drifting lower.
Actually, the dollar has been in distress over the last 365 days. . .
It lost value steadily for the entirety of 2017.
Look for yourself. . .
This isn’t the first time we’ve covered this decent—this is no surprise.
After three years of strong gains –13% in 2014, 9% in 2015 and another 3.5% in 2016– the U.S. Dollar simply ran out of momentum.
In our view, reality suggests the dollar has peaked and is now in decline, and will decline further. Much further.
Because the dollar rises and falls for the same reason that everything else does—supply and demand.
Generally, policies that increase the supply of dollars—like printing billions of them for instance—correlate with a fall in the value of the dollar.
And in general policies that increase demand—like raising interest rates—correlate with a rise in the value of the dollar.
Investor expectations of the future also affect supply and demand fundamentals: expectations of a strong growing economy correlate with a strong dollar, while pessimism correlates with a weak dollar.
In 2014, the Federal Reserve started to end QE 3 (printing money), while also talking publically about raising interest rates. And the dollar soared, as expected:
This gave us three consecutive years of a strong dollar, until 2017…
And here is where it gets interesting.
Since 2015, the FED has raised rates five times.
Three of the five rate hikes were in 2017. And yet, the dollar continued to decline.
In other words, it’s not working anymore.
What does this mean?
It means that investors’ beliefs that a recession is coming outweighs the returns of higher interest rates.
Or it means that investors believe the fed is raising rates now only to lower them in the near future—possibly in response to a recession.
And 2017 showed investors the early signs of coming depreciations:
- Outside of Wall Street, the economy is sluggish at best.
- Debt loads are unprecedented on personal, state, and federal levels. Think mortgages, subprime auto loans, student loans, Illinois…
- Other economies—Europe, Brazil, Argentina – have recovered, giving currency investors options other than the dollar.
And, the FED has another problem. It might be creating the very recession it seeks to avoid.
Because historically, higher interest rates also correlate with recessions:
So what happens next?
We believe the dollar will continue to fall despite rate hikes, and the evidence suggests a recession on the horizon, perhaps even a spectacular crash akin to 2008, or worse.
And those events correlate with…a much higher gold price.
And positioned correctly…we can profit from both those events.
Over the next few weeks we’ll be publishing our exact trades and positions,
So stay tuned,
Christoph Grizzard, The Fat Cat Investor
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