How Low can the Dollar Go?
The US Dollar has lost 65% of its value against the Euro over the last 7 years. It's no coincidence that a massive Hedge Fund industry has risen in its wake.
There are around 8,000 hedge funds globally managing over 2.5 trillion Dollars. All of them placing bets on global markets. Betting the market will rise, will fall, will do nothing. The vast majority are long only which means they benefit from a rising market.
The underlying trend behind this level of speculation - the likes of which the world has never seen - is the fear of the world's reserve currency, the US Dollar, becoming worthless. The fear of an outbreak in hyperinflation and a repeat of The Nightmare German Inflation of the 1920s (exceptionally well documented in the linked article reprinted from Scientific Market Analysis, 1970).
During the German Hyperinflation, the entire economy switched from production to speculation. In an effort to protect against a collapsing paper currency, people put their energy into speculating in things as opposed to building or producing.
As I mentioned in Using Commodity Prices as an Inflation Calculator the fact that Corn prices are at 35-year highs is a sign that inflation is boiling up from beneath the surface and the proliferation of hedge funds indicates they are the speculative vehicle of choice.
The sole question on this analyst's mind as to [how] high the speculative frenzy will go is how low will the US Dollar fall?
USDollar vs Euro
[courtesy of stockcharts.com]
This dramatic chart shows the US Dollar versus the Euro. The Dollar has only recently broken major support below 0.60 (60 Euro cents to a Dollar). This has caused a break below a humongous multi-year head and shoulders pattern. The technical target is 40 cents or 33% lower. A HUGE destabilizing move for the US Dollar lies ahead.
As in the Weimar Republic, the speculative fever today will continue to build as the US Dollar falls. That is, money will flee from devaluing cash into anything that will hold or increase its value namely stocks with gold and oil stocks outperforming. Based on the above analysis this is still quite a way away. The level and magnitude of speculation will be simply breathtaking. In the interim, the already large amount of Hedge Funds and Asset Management companies will continue to grow as will their assets!
-Greg Silberman CA (SA), CFA
I am a private investor in the resource sector. Please visit my blog for more free articles and analysis. Click here: http://goldandoil.blogspot.com/.
This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.