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I have been and remain a bear on the dollar. Back in mid-August, I conceded that the gathering momentum in the dollar trade would postpone the weak dollar scenario until 2009. I was wrong on a few of my reasons for expecting continued strength in the dollar, but a stronger dollar is what we have.
I know a lot of dour folks have explained why they expect America's "well-intentioned" borrowing and printing binge to lead to rampant inflation in the future (Peter Schiff is one of many examples). I have also tried to make the case. The main crux of my current opinion is that America will win its fight against deflation, sooner than later, and will be too slow to remove the monetary (and fiscal) injections into the economy to stave off the high inflation we will get as our reward.
The first signs of fresh dollar weakness are finally showing up. The chart below shows a potential double-top in the dollar. Some technicians may prefer to call it a head-and-shoulders pattern.
It is at these kinds of critical transition points that people who want to cling to the former trend will proclaim the loudest that all is well. Dollar bulls surely believe that the fundamentals of the currency have never been better given the world's belief that the dollar represents a safe place to park in a world of turmoil. Maybe major global governments borrow and print even faster and harder than we are doing. If that happens, I will have to like gold even more since its global supply will not increase nearly as fast as the supply of global money. Regardless, we should all know by now what results when a massive crowd jams into one side of a trade - short-term Treasuries represent the powder keg du jour.
Until recently, it has been difficult to play commodities in anticipation of reflation given prevailing downtrends. Gold has held up better than most but it too is still caught in a downtrend of lower lows and lower highs. The recent weakness in the dollar has perked gold back up, and I am sticking to it as one of my favorite places to be for 2009.
The dollar down, gold up scenario gets delayed again if the dollar manages to make a new high above the recent double-top and gold makes another lower low.
Be careful out there!
Full disclosure: long GLD. For other disclaimers click here.