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March 20, 2011

A Dollar Crisis Has Arrived

To say that financial markets have experienced a bit of turmoil since my last public piece back in late February would be an understatement. Middle East revolts as well as a devastating natural disaster have kept traders' heads spinning. The Nikkei suffered a 20% drop before rebounding sharply. U.S. equities have seen their largest pull-back since last summer, and the precious metals rally has turned out to be every bit as volatile as anticipated.

Nonetheless, markets have basically progressed along the paths that cycle analysis suggests. The dollar continues to unravel into a major low which I believe will be accompanied by a sense of panic and crisis. A major step toward that low was taken Friday as the buck broke the November low.

DX Daily

With the losses of major support levels, recognition of the dollar's troubles should accelerate the decline. After all, if the buck can't catch a bid in the face of all the devastating news springing up around the world, it must be in genuinely serious trouble. Since November, when the last intermediate low formed, I have been eyeing late April as the time frame for a major low. However, for reasons discussed in the Member Letter, I am now watching for signals to confirm this low will be pushed out to early summer.

The brewing dollar crisis should keep precious metals in play and move them into a parabolic peak similar to the 2006 and 2008 runs.

Gold Weekly

So the action in both the dollar and precious metals is unfolding more or less as anticipated. As for stocks, the correction I've been expecting since December has finally arrived. The surprise that may now greet equity traders is that the correction may be over.

SPX Weekly

Markets conditions are aligned to deliver some rather significant moves, as well as longer-term inflection points, during the spring and summer of 2011. The precise timing of such moves will depend heavily on whether the dollar forms its 3-year cycle low in April or pushes that low out to early summer. Either way, I expect the action in all markets to become significantly more volatile... and interesting... during the second quarter.


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