THE US DOLLAR We have discussed how the Fed is using the printing of large numbers of US Dollars, called US Dollar inflation, as the main weapon against the massive deflationary backdrop. The US Dollar inflation will create price inflation which first shows up in the rising prices of the commodities like the base metals and the agricultural sector, before those cost rises move up the chain of finished goods as much higher price inflation to the consumer. We have shown this effect in charts earlier in the series. We have also discussed how the value of the US Dollar drops as Dollars are printed, and the supply of US Dollars increase. The falling value of the Dollar even affects the charts that we see such as the chart of the Dow since the Dow is denominated in the US Dollar. We have shown how a falling Dollar can make a crash on a chart of the Dow look pretty tame. Below, we again show a chart of the Dow over a long period of time. We see that in the 1929 period, the Dow crashed about 90% from its highs. In this time period the Dollar was pretty strong because it was backed by Gold. The Gold backing prevented the Fed from printing Dollars at will because they could only print Dollars to the extent of Gold they owned to back it. Thus, the crash of the Dow occurred during a time of a “strong and pretty constant-valued Dollar.” During the 1970’s, the Dollar was not backed by Gold so the Fed could (and did) print all of the US Dollars they wanted to, thus causing the supply of the Dollar to rise while the value of the Dollar dropped fairly dramatically. During the 1970’s, the Dow moved through a series of highs and lows while it basically oscillated sideways, instead of “crashing on the chart.” In the 1970’s the Dow only fell about 40% at its lowest point from its high. Chart, below……….
We can see the real effect of US Dollar inflation in the 1970’s on the Dow chart in the next chart that shows a long-term chart of the Dow divided by Gold. In terms of Gold which acts as Real Money in times of financial turmoil by staying constant in value to protect your savings, the Dow crashed in the 1970’s just like it did in the 1929 period. In fact, the Dow as measured by Real Money Gold actually crashed worse in the 1970’s than in did in the 1929 crash, against Gold. This is a very important concept to understand since we are in a period of US Dollar inflation much like the 1970’s at this time. Thus, we might see the Dow only fall about 40% from its ultimate top on a chart of the Dow, but still crash in value against Gold as it did in the 1970’s. If that were to happen, the Dow and Gold might revert back to about a 1:1 ratio somewhere around 40% off the Dow’s 2007 highs. That could be to around a level of 8,000 to 8,400. If that were to happen, we would expect that $Gold might hit a high of around $8,000 in the coming years. Please remember that Gold stays at a relatively constant value, but is divided by the local currency like the US Dollar. Thus, as the Dollar drops $Gold rises at a logarithmic rate.
Next up is the US Dollar chart I have been showing all along. This chart was created back in early 2007, but the first time I showed it in this editorial series was back on Feb. 26th. At that time the Dollar was sitting at around 74.46, just below the top black angled line. It might have looked like there was little chance for the Dollar to drop straight down to the area where the blue line and the middle black line meet, but that is exactly what it has done over the last few weeks. As I stated a few days, ago, the Dollar appears to be short-term oversold, but in a Bear Market things can get oversold and stay oversold. This is especially true during a time when the Fed is monetizing everything in sight to protect the markets from crashing. On top of that, it is expected that the Fed will further cut interest rates later today. We suspect that the US Dollar Index might fall all the way to around 63, later this year.
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