Don't bet on the dollar

Despite the ongoing turmoil in the eurozone and a dramatic drop in the euro, there are signs the greenback's recent uptrend is about to end.

By Anthony Mirhaydari May 30, 2012 1:10PM

The market's grinding volatility continues as the euro plunges to levels not seen since the initial panic over the first Greek bailout back in 2010. There has been no shortage of market-moving headlines, including news of another Spanish credit downgrade, word that Chinese lenders are cutting their exposure to Europe, rumors of European Central Bank resistance to Spain's bank recapitalization plans (later denied) and a plan by the European Commission to use eurozone bailout funds to directly recapitalize troubled euro banks.

 

A lot of moving parts here, obviously. And while the U.S. dollar has strung together an impressive rally -- up 19 of the last 21 days, crushing dollar-sensitive commodities like gold, silver, crude oil and copper -- there is evidence the Wall Street heavy hitters are using the chaos to build short-dollar, long-commodities positions at low cost. Here's how to participate.

 

 

Based on the latest futures data, commercial traders have increased their bets against the dollar to the highest level since at least 1999. In other words, they don't see the dollar's rise (and the euro's fall) as sustainable. For one, the United States is on a collision course with the "fiscal cliff" I recently warned about as the debt-deficit problem remains unresolved amid a nasty presidential election.

 

Also, the situation in Europe has reached a stage where the European Central Bank and/or AAA-rated core members like Germany will be compelled to soften their stances against pro-growth measures that move the eurozone closer to a true fiscal union. Ideas on the table include liability sharing (issuing bonds backed by the entire eurozone), a eurozone-wide deposit insurance scheme and the use of eurozone bailout funds to recapitalize troubled banks in Spain.

 

At the same time, public opinion toward the dollar has reached a historic high based on data from places like Ned Davis Research, Bloomberg and Larry Williams compiled by the folks at Sundial Capital (as shown below). Current levels were associated with dramatic dollar peaks in late 2008 and early 2010 (the first Greek bailout).

 

This might seem odd: The eurozone situation is clearly worsening, yet Wall Street is growing increasingly bullish on the euro while Main Street is loving on the dollar. Spanish 10-year bond yields are fast approaching their November highs as the euro crashes. So what gives?

 

Again, I think the key here is to interpret the situation like this: Much of the bad news is already discounted (just look at bombed-out European bank stocks) and sentiment has been shattered. Both the European Central Bank and Germany are under extreme pressure to do something, anything, maybe just a wink and a smile, to indicate they are considering or even willing to consider additional measures to stabilize the situation -- at least until the Greek people vote again on June 17.

 

Indeed, the polling suggests the situation in Athens is beginning to go the pro-EU bureaucrats' way. New polling puts the pro-bailout right-of-center New Democracy party at 23.4% of the vote vs. 22% for the radical left Syriza party.

 

The need for action by Europe is growing more intense with reports that the Chinese government is not considering rolling out another massive stimulus -- on the scale of what was seen back in 2008 -- to counter this year's economic slowdown. No doubt this is due to still lingering inflationary pressures.

 

Options include another offering of liquidity to the financial system by the European Central Bank, granting the eurozone bailout fund a banking license so it can borrow form the ECB, or Germany's embrace of liability sharing mechanisms, such as the European Redemption Pact idea gaining traction in Berlin.

 

ECB support will almost certainly factor into any plan of action -- since it's the "easier" political solution in the sense that it doesn't require explicit taxpayer funding. It will also be seen as a dollar-negative, euro-positive and add further support to long-term inflation dynamics. All of this boosts the fortunes of precious metals, an area of the market many investors have left for dead after months of underperformance.

 

 

Gold is down 13% from its February high and is down 1% from its September peak of $1,923.70 an ounce.

 

Wednesday's market action shows a growing number of participants are coming to this conclusion. While stocks and the euro remain depressed, traders are actively bidding up precious metals and related mining stocks. I think the reversal point is upon us. And that means rather than flock to the safety of the dollar, investors should seek gold and silver as refuges from what comes next.

 

Be sure to check out my forthcoming article later that provides a few more reasons precious metals are worth a look right now. 

 
Trading update

In the Edge Letter Sample Portfolio, I've already established positions in the VelocityShares 3x Long Gold ETN (UGLD) and the Junior Gold Miners ETF (GDXJ). Today, I'm going to double down by adding silver exposure via the VelocityShares 3x Silver (USLV) and the Global X Silver Miners (SIL).

 

For the less aggressive, there are a number of unleveraged options, including the Gold Trust (GLD) and the iShares Silver (SLV).

 

 

Disclosure: Anthony has recommended SIL to his newsletter subscribers.

 


Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

49Comments
May 30, 2012 6:26PM
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i can't wait intill it all comes crashing down and the rich lose it all then they will be just like me,and as fare as giving them a job f them......................
May 30, 2012 6:19PM
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...and our Government was the one that used OUR TAX DOLLARS to buy all those Euros a while back, I rest my case...
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I hate to use the word fool but sir you are one.  You can write negative comments all you want about the dollar but it is THE ONLY STABLE CURRENCY LEFT!  The US will avoid a double dip recession because of problems with the EURO.

 

Wake up, as much as we have overspent, we are the only nation on the planet that says what it means and has a population that when it comes time to pay the bill, will.

 

I traded Govt bonds back in the 80's and some in the 90's and our biggest worry back then was the rising yen and the rising trade deficit.  Both will reverse, DRAMATICALY.

 

Unfortunately, this economy works only for us.  I am not smart enough to know why, but the American spirit will not die nor is it possible to export.

 

IMHO.

May 30, 2012 5:00PM
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Mirhaydari isn't smart enough to be wrong on everything, but this isn't the one he'll get right.
May 30, 2012 4:45PM
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After yesterdays column about baby boomers the guy in my opinion has no credability about any financial subject.
May 30, 2012 4:20PM
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Wrong, Wrong, Wrong!  Oil prices coming down will take care of the fiscal cliff in 2013.  Go ahead raise taxes, with gas at $3 gallon it will be a net positive of $250B.  Who cares if the idiot wall street guys are buying up commodities, they have been trained that way for the last 5 years, guess what the Market doesn't care and you think they would have learned their lesson from JPM, trying to dominate a market that know one is in but them. (Trading margins were increased in oil today,down $3-who cares)  And finally, I think our boy Ben is finally starting to get it.  Don't hold your breath for QE3!  How can the dollar not get stronger? China ahh sucks, Europe ahh sucks, Brazil ahh sucks, we just suck less.  I am going to short this market until the Euro is at parity and refinance my house in about month.
May 30, 2012 4:13PM
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Recommended buys for todays market, survival food, ammo and silver!
May 30, 2012 4:09PM
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I don't understand how anyone can ask the European Central Bank to continue to give money to Greece, Spain, Italy, Etc., Etc when these countries refuse to curtail their spending and already have an impossible debt to GDP ratio.

Yes Anthony, we are on a "collision course" with our own debt problem. Our currency is also becoming less valuable. But it is for the same reason that the Euro is falling-A socialist leader who refuses to curtail spending and a Fed that continues to make the $ worthless by keeping interest rates unrealisticly low while infusing the system with more and more U.S. dollars.

Things become valuable because they are difficult to get; this is not the case with the dollar.

 

True capitalism does not have constant interference from the government-Socialism does!!!

May 30, 2012 4:07PM
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Mirhaydari loves to use charts to prove his point. Don't fret about anything this article states, because tomorrow or Friday, he'll write a post about why the dollar is stronger than ever.... and he'll use charts to prove his point. (place obligatory eye roll here)

Nevertheless, get ready for the one world money system. It is coming... like it or not.

May 30, 2012 4:00PM
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Don't worry all you smocks

On December 21 this year... it's all over anyways....right

 

You dooooo believe that?   :)

May 30, 2012 3:44PM
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Wall Street has become the east coast's version of Vegas. The problem is that the US economy is reliant on it. I rather have Vegas run the economy at this point.
May 30, 2012 3:21PM
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THE END IS NEAR!!! YAY!!! Oh boy have I been praying for this day.

 

*Rolls over and goes back to bed and waits for the zombie invasion to eat the greedy folks that are corrupting this Earth.*

 

"It is easier to fit a camel through the eye of a needle than it is for a rich man to get into Heaven."

May 30, 2012 3:21PM
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I really think its time to stop the short and longs and took these out of the market and stop you  people manipulating things to make money. Gone are the days when you would invest in a company you had confidence in to pay dividends or increase capital. Now, you but futures and puts to drive the price in one direction or the other to make money either way and in the process make the market volatile when really it isn't. It is just people like you abusing gambling instruments that should be banned.
May 30, 2012 2:16PM
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In finance the word scheme is used a lot. I wonder?
May 30, 2012 2:00PM
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The next big test will come with the Greek elections.  It is too close to call.  Whatever the outcome will not be good.  The US market is linked with Europe and China.  Anyone want to put money on this horse race?
May 30, 2012 1:44PM
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With all the money the Fed has printed the ONLY reason the dollar is strong is due to the weak Euro and economy as a whole.  As such I agree with Anthony but I see gold down to $1,400 or even $1,300 prior to its big rise.  Similary once the inflation and dollar drops comes into play, most commodities will rise too.  Gas/Oil may jump sooner rather than later if/when Israel bombs Iran's nuclear facilities.  You are kidding yourself if you think Iran is going to be honest after 11+yrs of lies.... 
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