reserve currency | Margin Rich

Beware the Secular Trend’s Potential Short-term Counter Move

Posted on December 28, 2020 by Margin Rich

Right now the markets are at extremes. Essentially all of them. Current price action across a broad swath of sectors and assets classes strongly reminds me of the end of 2019 and beginning of 2020.

My gut tells me that a fear-event is near. And my gut is being primarily led by current action in the US dollar. Short positioning in the buck is extraordinary.

Yeah, yeah, macro-top-down, commodity bull, central bank largesse, and all that in regards to the USD but this is egregiously exaggerated. Not that it can’t get more extreme, but consider the following charts.

Seasonality, courtesy of SentimenTrader, tends to be pretty strong in January for the buck.

With currencies, large fast moves in a short period are atypical but we live in a time of atypical. Pairs always have to be acknowledged and the anti-correlation to the euro is at a bit of an extreme. In the last decade, every time the Euro to USD line (white-monthly) has approached 2 standard deviations above the 25-month MA, then it’s been go-time for a USD rally (green).

Does this mean a reversal is imminent? Nope. Does it mean additional portfolio hedging here is warranted? I’d say it’s a prudent use of capital.

The long-term case for the dollar’s demise is well documented. Goldbugs have been the longstanding voice of fiat destruction, but more recently, Ray Dalio has picked up the baton. Sam Zell has now officially thrown his name in the dollar-destruction ring with this recent quip.

The single greatest risk that we are dealing with today is the loss of the U.S. dollar as the reserve currency. If we keep doing what we are doing right now, I think it is 10 or 15 years away.

These investment legends are right. The USD will in all probability lose 30% to 40% of its reserve status this decade. And world markets as well as geopolitics will be volatile as a result.

Why do you think Bitcoin has jumped so hard? That’s institutional fear of central banking monetary policy, not retail FOMO driving Bitcoin. It’s palpable, but it’s ahead of itself in the USD and Bitcoin.

Nothing moves in a straight line and short-term counter spikes in any trend are as sure as sunrise. I’m not implying that a fear-event has to rival Covid’s March spikes or we’re at a long-term top in equities. Just saying that a short-term move to remove some excess is worth hedging at this point.

Hey Gold, Don’t Get Cocky!

Posted on July 14, 2019 by Margin Rich

Seen this movie? If not, it appears to be starting another theatrical run.

With the recent action in gold, the precious metals bugs are all stirred up. Price action has been constructive. Big time asset management names are mentioning it and the metal is definitely conveying a message. New songbirds are putting their price calls out there for short-term and long-term destinations. The old songbirds are putting their same old calls out there as they suffer permanently from the fever.

There’s no fever like gold fever, and I’m an expert in the symptoms.

We’re already seeing the $10,000 and up per oz. calls for gold. What’s funny is you see the same old reasons for why precious metals are going to boom. Everybody was selling the same handful of points in the last gold bull run and those same points are being tossed out there again as if they have meaning or truth.

– Negative real interest rates

– Excessive debt loads

– Accommodating monetary policy by central banks

– US Dollar losing value via debasement

– Inflation expectations

– Supply shortcomings

This is folly. These are not reasons for anything; merely convenient sales pitches that still work on the zealous subset of speculators that are looking for either a reason to stay devoted to the precious metals or believe an amazing amount of money will be made by a small speculation.

From a technical analysis standpoint, it’s time for a rally and the price action hasn’t disappointed thus far. However, technical analysis has virtually no merit any more due to the advent of the internet. This has been statistically proven. Tape-reading still has merit in conjunction with technical analysis and fundamental analysis, but it takes real talent and luck to fight the machines. Here’s a Captain Obvious chart of gold proving higher prices in the making.

But there’s only one thing that could potentially drive the price of gold and the precious metals to those high price levels so blithely forecasted. Here it is in plain, bold English:

A HIGH PERCENTAGE LOSS OF RESERVE STATUS IN THE USD

That’s it. I believe that to be the only driver that will get gold up over $5,000/oz. or higher. Something in the order of the USD losing perhaps 35% or more of it’s reserve status which will coincide with decreased use of dollar-settlement in international trade. Or said another way, chaos. Because if the rest of the world decides to shift part of the USD’s reserve status to another currency whether it’s gold, Bitcoin, SDR, yuan, etc.; you can bet those in power in the US will be wreaking havoc as a result. This will be adjoined to the financial/economic chaos that will already be in place.

There still exists old-world faith in the precious metals, and blockchain currencies do not have enough cumulative faith by investors to reel in allocation decisions. This is the path for significantly higher prices in gold, silver, and the PGM complex; potentially even for the commodity complex.

Regime changes in currency reserves are not fast. They don’t just happen like a stock market correction. Many powerful and wealthy nations have a vested interest in the USD maintaining it’s ultimate reserve status. Just bear that in mind as we watch the dynamics between all asset classes, markets, economies, and countries play out in real time going forward.

It’s tough to visualize if you can’t foresee a world where the USD loses place and face. But hell, don’t take my word for it. Google and consider the opinions about the subject of some of the most powerful financial insiders in the world: Larry Fink – Head of Blackrock, Ray Dalio – Largest principal in the largest hedge fund in the world, and Mark Carney – Head of the Bank of England.

Ain’t no fever like gold fever. Keep your wits goldbugs.