The Strange Case Of The Falling Dollar – And What It Means For Gold

This article was written by Brandon Smith and originally published at Birch Gold Group

Trillions of dollars in uncontrolled central bank stimulus and years of artificially low interest rates have poisoned every aspect of our financial system. Nothing functions as it used to. In fact, many markets actually move in the exact opposite manner as they did before the debt crisis began in 2008. The most obvious example has been stocks, which have enjoyed the most historic bull market ever despite all fundamental data being contrary to a healthy economy.

With a so far endless supply of cheap fiat from the Federal Reserve (among other central banks), as well as near zero interest overnight loans, everyone in the economic world was wondering where all the cash was flowing to. It certainly wasn’t going into the pockets of the average citizen. Instead, we find that the real benefactors of central bank support has been the already mega-rich as the wealth gap widens beyond all reason.  Furthermore, it is clear that central bank stimulus is the primary culprit behind the magical equities rally that SEEMS to be invincible.

To illustrate this correlation, one can compare the rise of the Fed’s balance sheet to the rise of the S&P 500 and see they match up almost exactly. Coincidence? I think not…

FedBalanceS&P

Another strangely behaving market factor that has gone mostly unnoticed has been the Dollar index (DXY). Beginning after the global financial crisis in 2008, the dollar’s value in reference to other foreign currencies initially moved in a rather predictable manner; collapsing in the face of unprecedented bailout and stimulus programs by the Fed, which required unlimited fiat creation from thin air. Naturally, commodities responded to fill the void in wealth protection and exploded in price. Oil markets in particular, which are priced only in the US dollar (something that is quickly changing today), nearly quadrupled. Gold witnessed a historic run, edging toward $2,000.

In the past few years, central banks have initiated a coordinated tightening policy, first by tapering QE, then raising interest rates, and now by decreasing their balance sheets. I would note that while oil and many other commodities plummeted in relative value to the dollar after tightening measures, gold has actually maintained a strong market presence, and has remained one of the best performing investments in recent years.

Something rather odd, however, has been happening with the dollar…

Normally, Fed tightening policies should cause an ever-increasing boost to the dollar index. Instead, the dollar is facing a swift plunge not seen since 2003.

What is going on here? Well, there are a number of factors at play. First, we have a growing international sentiment against US treasury bonds (debt), which may be affecting overall demand for the dollar, and in turn, dollar value.  For example, one can see a relatively steady decline in US treasury holdings by Japan and China over the course of 2016, with China being the most aggressive in its move away from US debt:

We also have a subtle, yet increasing, international appetite for an alternative world reserve currency. The dollar has enjoyed decades of protection from the effects of fiat printing as the world reserve, but numerous countries including Russia, China, and Saudi Arabia are moving to bilateral trade agreements which cut out the US dollar as a mechanism. This will eventually trigger an avalanche of dollars flooding into the US from overseas, as they are no longer needed to execute cross-border trade. And, in turn the dollar will continue to fall in relative value to other currencies.

There is also the issue of coordinated fiscal tightening by central banks around the world, with the ECB and even Japan moving to cut off stimulus measures and QE.  What this means is, other currencies will now be appreciating in terms of Forex market value against the dollar, and in turn, the dollar index will decline further.  Unless the Federal Reserve acts more aggressively in its interest rate hikes, the dollar's decline will be brutal.

Finally, we also have the issue of nearly a decade of Fed stimulus that has gone without audit (except for the limited TARP audit, which shows tens of trillions in money/debt creation). We truly have no idea how much fiat was actually created by the Fed – but we can guess that it was a massive sum according to the seemingly endless rise in equities from a point of near total breakdown, funded by quantitative easing and stock buybacks. You cannot conjure a market rebound merely with debt. Eventually, that currency creation and the consequences will have to set a foot down somewhere, and it is possible that we are witnessing the results first in the dollar, as well as the Treasury yield curve, which is now flattening faster than it did just before the stock market crash in 2008.

A flat yield curve is generally a portent of economic recession.

I believe that this is just the beginning of troubles for the dollar and for US bonds. Which raises the question, how will the Fed react to a dollar market that is so far completely ignoring their tightening policies?

Here is where things get interesting. Throughout 2017, I warned that the Fed would continue to raise interest rates (despite many people arguing to the contrary) and would eventually find an excuse to increase rates much faster than previously stated in their dot plots. I based this prediction on the fact that the Fed is clearly moving to pop the enormous fiscal bubble it has engineered since 2008, and that they plan do this while Donald Trump is in office (whether or not Trump is aware of this plan is hard to say). Trump has already taken credit on several occasions for the epic stock rally, and thus, when the plug is pulled on equities life support, who do you think will get the blame? Definitely not the banking elites who inflated the bubble in the first place.

Even the mainstream financial media has admitted at times that Trump will “regret” his campaign demands that the Fed hike rates and stop pumping up stock markets, as he will be inheriting a fiscal punch in the gut.

The Fed, as well as the mainstream, have also planted the notion that the Fed “will be forced” to raise interest rates faster if the Trump Administration pursues its plans for Hoover-style infrastructure development.

But, on top of this, the “problem” of the falling dollar also introduces a whole new rationale for speedy interest rate hikes. I believe that soon after Janet Yellen leaves as Fed chair and Jerome Powell transitions in, the Fed will begin an exponential increase in rates and will speed up their balance sheet reductions. And, they will blame the unusual decline in the dollar index as well as falling Treasury demand as the cause for more extreme action.

Powell has already backed “gradual rate hikes” in 2018, and, a few members of the Fed expressed a need for “faster hikes” in the minutes of the last meeting in December. I predict this sentiment will expand under Powell.

A small number of Wall Street economists are also warning of more rate hikes in 2018, and that this could cause considerable shock to the virtual stock rally in play right now.

That might be the Fed’s plan. The central bankers need a scapegoat for the eventual bursting of the market bubble that they have produced. Why not simply allow that bubble to finally implode in the near term, blaming the Trump administration and, by extension, all the conservatives that supported him? To do this, the Fed needs an excuse to hike rates swiftly; and they now have that excuse with the dollar dropping like a stone (among other reasons).

But how will this affect gold?

So far, gold has actually spiked along with Fed rate increases, which might seem counter intuitive, but so is the dollar falling along with rate increases. I do think that there will be an initial and marginal drop in gold prices if the Fed increases the frequency of rate hakes. That said, eventually reality will set into stock markets that the party is over, the punch bowl is being taken away, and Trump’s tax reform will not be enough to offset the loss of access to trillions in cheap fiat dollars from the central bank.

Once stocks begin to collapse in the wake of Fed hikes and balance sheet reductions (and they will), and uncertainty in the fate of the dollar swells, gold will bounce back stronger than ever. In the meantime, I would treat any drop in precious metals as a major buying opportunity. Gold is one of the few assets that always does well during times of crisis.

 

 

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After 8 long years of ultra-loose monetary policy from the Federal Reserve, it's no secret that inflation is primed to soar. If your IRA or 401(k) is exposed to this threat, it's critical to act now! That's why thousands of Americans are moving their retirement into a Gold IRA. Learn how you can too with a free info kit on gold from Birch Gold Group. It reveals the little-known IRS Tax Law to move your IRA or 401(k) into gold. Click here to get your free Info Kit on Gold.

 

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0
Don't fight the Fed
written by Renewed , January 13, 2018

A pretty sound maxim. Some believe that Silvers rise will be even more aggressive than that of Gold. Reality always shows up at some time. Here's to reality!
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On the dollar and all that
written by Interested Reader , January 13, 2018

Please don't overlook that the Fed might actually succeed in achieving renewed dollar strength. By raising interest rates fast and strong enough, combined with the Trump tax cuts, capital could (would) flow back into the US, mostly out of Europe and Asia. The ECB is scaling down its bond purchases, which will inevitably cause a debt crisis sooner or later in Italy and other zombie euro countries. The ECB, with its bloated balance sheet full of overvalued financial crap, is on the hook as well. See the record Target2 balances within the eurozone for any indication. A rising dollar would mean a vicious cycle of more panic dollar demand and more panic dumping of other currencies, foremost in Asia, as the amount of dollar debt outside the US is staggering. The dollarhaters probably will not have their day for a long time to come.
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Brandon Smith
...
written by Brandon Smith , January 13, 2018

@Interested

I think you missed the point, though. If the Fed succeeds in hiking rates fast enough to cause a dollar index surge, they will also succeed in crashing equities markets reliant on cheap capital flows. It's a Catch-22. THERE IS NO WAY for Trump to win, even if he wanted to, which I don't believe that he does considering the banker company he keeps.

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@Brandon Smith
written by Interested Reader , January 13, 2018

Brandon, thank you for answering. An inflow of money into the US would make the stock markets surge even more than now. Martin Armstrong predicts a Dow of 40,000 in the not-too-distant future (his so-called "vertical market" is about to take off). This is because of the Sovereign Debt Crisis and the accompanying monetary crisis (the euro foremost), which he predicts will start in 2018 and send money out of bonds into equities and other private enterprises. That 40,000 might even be a conservative estimate, depending on how much money will be wiped out in the coming crisis, which Armstrong compares to the 1931 debt crisis (the REAL Great Depression). My hat tip is to follow Armstrong´s blog at https://www.armstrongeconomics.com/blog/
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Brandon Smith
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written by Brandon Smith , January 13, 2018

@Interested

No, not necessarily. Armstrong has been wrong about most things, for example, he incorrectly predicted that the Brexit would be rigged against the Leave vote, and he also incorrectly predicted that the election would be rigged in favor of Hillary Clinton. On top of that, if I recall correctly, he also believes there is no agenda for a new world order currency, despite the fact that there is considerable evidence to the contrary. It just doesn't fit his narrative, so he dismisses it. He is certainly wrong about the issue of dollar inflows going directly to stocks.

Inflows of dollars into the US may very well go into other assets such as commodities, and I think you are also forgetting about crypto. With foreign investors forsaking US debt, stocks will NOT be considered a practical safe haven.

If stocks do rise to 40,000, it will only be because of blind mania, not because of inflows due to an international dollar dump.

But, again, you missed my point. Rising interest rates will stop banks and corporations from accessing cheap overnight loans and most loans in general from the Fed. This will end the stock buyback surge which has supported stocks until now.

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@Brandon Smith
written by Interested Reader , January 13, 2018

With the inflow into stocks, it could still be profitable for banks to lend out money with rising rates, when this would as well go into the stock market. Moreover, the money out of bonds into stocks could be more than enough to offset any decline in bank lending. And the fact is that Treasuries remain the most liquid parking place for money with no better alternatives in the world. On what exactly has Armstrong been wrong?
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Brandon Smith
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written by Brandon Smith , January 13, 2018

@Interested

Again, not necessarily. You are making considerable assumptions that investors will see US stocks as a safe haven during a dollar collapse. And AGAIN, why would there be dollar inflows if the Fed is actually successful in hiking rates fast enough to impede a dollar collapse (which was my original point)?

I highly doubt US stocks will be considered a safe haven, considering commodities and crypto and foreign bonds are a safer bet, and the stock values are massively inflated already when compared to corporate earnings and debt. It sounds like you are grasping at straws to believe stock markets will maintain momentum.

Read my post again, I give three BLARING examples of Armstrong being wrong.

So far you are simply arguing hypotheticals that are a stretch at best, and arguing hypotheticals is truly a waste of time. We will have to wait and see who is correct and who is not.

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0
magic
written by 24/7_michel , January 13, 2018

haha, unbelievable!
after reading brandons new thread, i thought "as always interesting thoughts and when i'm fitter tomorrow, i had to reply regarding armstrongs theory"
then i went to the comments and while reading the first one from @interested reader i thought "hm, this sounds like something familiar"
:-D
then it was clear that he/she/it ;-) was refering to armstrong - pefect!

first, after i get purely sucked into the outer matrix about 10 years ago (the 20 years before i discovered the inner one plus quantum physics and all that stuff which belongs to "reality") i've subscribed hundreds of blogs and watched hundreds of hours on youtube, including really all economy/money "experts" and many many religous, conspiracy, secret society etc pp experts.
life is much to short and after i got a really closed logical big picture i limit my subscriptions to less than 10, one of them is yours brandon and on the other hand, armstrongs as an economy "expert" (the only one (expert) who survived in my rss reader)

if you want to understand armstrongs concept you have to read much of his older writings from jail.

regarding your 3 examples i have to say that the predictions from socrates are all correct. what you mentioned is armstrongs personal view and excpectations cause he could't/wouldn't believe what the software predicts including his experience with the club as he called the fascist union of politic and banksters.

his 26.000dow bear rally predictions dates back to the eigthies!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

for me both of the pictures and predictions makes sense but from different standpoints.
armstrong from his cycle and money flow concept an brandon from the nwo master plan, to which i also believe and armstrong not.

he was also right with the gold high and the following down site turn.
his modell said that the dollar strengthen up, also with the stock and as @ir has said, this will happen cause "the money" is looking for a (relative)safe heaven when the shit turns upside in europe and asia.
when that happens and the people are loosing their confidence in the politicans and system, it's time for precious metalls, but only if the time is right and this all happens in the main economy areas.

i'm not stupid and 10 years ago i wasn't able to explain what inflation is, it's no coincidence that i doesn't miss any of armstrongs updates.
that very said, his special reports are so expensive and i still couldn't find anything on the net, cause they are much much more in details than his public blog listings.

but what me really really concers here in the fucking eu, esspecially in the world central of the dumpest sheeples ever aka germany, when that time or predictions from one of you has arrived, what will these state schmarotzer/parasite think out to get "their" part of the pm when we need to change it into the new probably crypto currency?
you have no idea what these heinous bastarts are done in the past, to fullfill the public purse.
that's the reason why i have to leave not only germany, but best hole europe, cause it's the nwo laboratory!

when i begin my investigation journey 10 years ago after my beloved dad passed away, really all and everything which i stumbled over and got my attention where i thought "hmm, sounds crazy but make sense" came true and one of it was, that the nwo will take their beginning in germany!
in the meantime i also think it's true, cause you've got really no idea what's going on here, idocracy looks like a very cute children's book or so.
it's picture perfect bolshevism, socialism and communism at once and all that on steroids.

ok, bed time now ;-)

brandon, thank you very very much again for your thoughts, you're the brother or friend i wanted to have, with a clear, healthy and non indoctrinated mind!

ups, comletley forgotten: a healthy and finde new year for you and your family!

kind regards from the central of.....(you know meanwhile)

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...
written by l.m. , January 14, 2018

Armstrong´s mistakes: real estate pik in 2015,75, he was most wrong on cryptocurrency and its future, socrates didn´t now that trap of NWO is cashless society?, what a joke! He is one of the most NWO world currency cheerleader in the name of China(MMF). It might be interesting to know about Armstong´s connection with Chabad Lubbavitch.
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Cross-currents risk in the global asset market
written by Arnold Ziffel , January 14, 2018

Strengthening the dollar raises the global purchasing power of the currency that enriches every holder of the currency and America enjoys to cheap import prices. However this creates a conundrum for the Federal Reserve. If the Federal Reserve keeps rates low Triffin's Paradox occurs where dollars return to the US increasing inflation and power boost the stock market. Currently we are seeing stock market inflation. Consumer demand is trepid so we are not see higher inflation in goods. If the Federal Reserve significantly increases interest rates foreign countries would buy new debt issuances and the stock market would drop and global trade would not be impaired. The 64,000 question does the Federal Reserve let the stock market drop since it uses it as a measure of economic stability.

The dollar regardless of the Fed's actions will increase due to higher oil prices since oil is denominated in dollars. Oil is currently bumping up to $70 (40% increase the past few months) and it could go higher due to geopolitical issues, ie Saudi civil war and the collapse of Venezuela. Given the influence of oil prices it is possible the Fed doesn't raise rates significantly and lets oil prices due their dirty work. Given all the cross-currents at risk gold looks like the best hedge due to future uncertainties in the value of the dollar.

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Brandon Smith
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written by Brandon Smith , January 14, 2018

@Arnold

You have it backwards - oil is rising BECAUSE the dollar index is falling in value relative to other currencies. The dollar is NOT falling because oil is rising.

Also, the stock market bubble will collapse eventually regardless of what the Fed does. They know that they can't keep such a fraudulent rally going forever. This is why they ARE raising rates and reducing their balance sheet. Raising rates also makes it too expensive for corporations to continue borrowing trillions in overnight loans from the Fed, which means a primary source of capital they could use for stock buybacks is disappearing.

The Fed clearly plans to crash markets in a controlled manner and use Trump and conservatives as a scapegoat. All they need now is an added distraction, such as a war...

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So who is investing in the stock market?
written by Arnold Ziffel , January 14, 2018

We know that individuals other than their 401K are not investing. So who is investing in the stock market hedge funds, banks, or sovereigns?
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Brandon Smith
...
written by Brandon Smith , January 14, 2018

@Arnold

Until now it has been primarily central banks. The Bank of Japan even openly admits their stock positions. The Fed is a little more indirect, though according to Powell's comments it would appear they do have a short volatility position. As central banks unwind their positions (as they are doing slowly now), one must wonder who is left to pick up the slack in markets?

Trump's corporate tax break is certainly not going to be enough to offset the loss of central bank stimulus.

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Direction of Corporate Buybacks
written by Arnold Ziffel , January 14, 2018

For corporations to convert the strong Euro to dollars for repatriation would cause currency loses. Add that to the one time tax for repatriation it would cause a significant hit to net income. Doubtful at this point in time corporations would repatriate their cash. Also many of the corporations have probably already leveraged through borrowings their Euro holdings to do stock buybacks. The tax impact may be moot when it comes to corporations moving funds back to USA.
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Peculiar Movements
written by dd12 , January 15, 2018

After the first fed funds rate increase in December 2015, the Fed has since executed 4 rate increases. they have indicated there are more increases to come. they have also made clear their intention to reduce the balance sheet, which they have already begun. this would normally strengthen a currency, and yet since the election the US Dollar Index is down 12%

the US 10-Year yields 255, which is significantly more attractive than Canada or Europe (with the exception of Greece, which is at 382) ... why isn't the dollar attracting capital?

China and Japan are net sellers of Treasuries. Bilateral trade agreements struck left-and-right between Russia and China for hydrocarbons. Sour grade crude futures, denominated in yuan, will begin trading Thursday on Shanghai. The world is abandoning the dollar, slowly but surely. Why wouldn't they, it's been defiled.

As this dollar capital is in less demand globally, and it gradually comes home, the inflationistas will get their wish. Only if the Fed wants to curb that inflation, it will have to raise rates further, thereby popping the current stock / asset bubble in the USA.

As Brandon has stated, there is no elegant way out of this jam. I think the global currency / sovereign debt markets are beginning to discount this ... just one guy's opinion.

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I'd Also Add
written by dd12 , January 15, 2018

the global oil market is very clearly in better shape than it was 2 years ago. but the last bit of the move has probably been juiced beyond its fundamental value by the dollar weakness, along with some momentum trading.

but also gold, almost purely a financial asset, is running and has appreciated 7% since the election.

inflationary assets are moving, ignore them at your own peril.

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Planned Pop
written by Guest , January 15, 2018

I think the key ( which many are forgetting) to the whole enchilada is what the Fed( read globalists) want for the economy. If you agree w/ Brandon- and I do- then you know they want the system to crash, maybe even spectacularly, to facilitate their cherished goal of a one- world system, politically and economically. They are definitely not trying to save our economic system, quite the contrary, they just will say anything to make us think they are. Any mental gymnastics we engage in to try to discern what will happen has to be based on this reality, or we' re all just playing in cloud-cuckoo land.

The coming POP will be a thoroughly planned and orchestrated event, and it will have to be executed soon, before they lose control of the whole teetering house of cards.

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