Global debt issues combined with weakening US economic data has reignited the quest to protect capital. Investors are seeking the ultimate safe havens in the US dollar (UUP), long term treasuries (TLT), gold (GLD), and silver (AGQ) in order to protect their wealth from the onslaught of currency instability and US economic weakness.
This month we have witnessed the US dollar gapping higher in response to euro (FXE) weakness. This may have been a head-feint, wherein the U.S. dollar has mainly shown strength in response to a comparatively weaker Euro. These gap movements are apt to be short-lived and filled quickly.
Some speculators may have misinterpreted this volatility in the greenback as signaling the end to the bull market in precious metals and commodities (DBC). A consideration of the long-term trends of the precious metals versus the U.S. dollar might reveal otherwise. Remember that the trend is your friend even though it may take time for it to become apparent.
Credit ratings are being lowered in Belgium and Italy as Greece appeals for additional aid. The debt crisis will be continuing for some time, which means that more euros and dollars will need to be printed. The US is in danger of defaulting and its debt ceiling of $14.3 trillion has been reached. Indeed, it may be dangerous holding the greenback (UUP) and long term US treasuries (TLT) at this time. This bounce in the US dollar should be used for repositioning into gold (GLD) and silver (SLV).
The US Dollar ETF has been in a long-term downtrend. The decline was staunched by the introduction of QE2 in the summer of 2010, in response to the fear of the European Debt Crisis metastasizing into a global contagion. This may be a case of deja vu. What we are seeing now may be a reprise of past actions where “Band-aid” dollars will be applied to stop the hemorrhaging. Think of all the fiscal activities our leaders are contemplating.
Additional monies will have to be printed to service our contemplated projects all over the world. Not even considered have been our own domestic needs. States and municipalities are claiming that they are in de facto default. Monies will have to be printed and accommodative policies may have to be accelerated,
From the standpoint of classical technical analysis, the US dollar broke three-year support at the end of January 2011. This area should now act as resistance during this countertrend rally.
Precious metals have bounced off key support and gold is challenging its all-time high at $1575.10. During the May margin hike, induced sell-off wealth may have gone from weak, speculative hands to strongly held positions for what may be a more sustainable up move.
Disclosure: Long GLD, SLV and Mining Stocks