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The Next Step for the Dollar and Gold

Written By Brian Hicks

Posted May 24, 2011

Money just has to be the most memetic stuff in the world.

Most currencies out there are basically communal hallucinations, powered entirely by the faith and credit of the folks who believe in them. And that belief ebbs and flows from moment to moment.

For example, right now the U.S. greenback is on a roll. As I sit to write to you today, the Dollar Index (DX), which tracks the ostensible “value” of the dollar compared to a basket of major global currencies, has picked up some 5% over the past month.

Keep in mind that the United States has not increased its GDP over that time. (If anything, guesstimates for same have dropped precipitously!) Neither have the other nations in the basket lost any productivity to speak of. And none of the countries involved have shifted about any gold to speak of over the past 24 days…

So what’s moving the dollar up?

Two ideative emotions: fear and greed.

It’s All Just Ideas (Until It’s in the Bank)

For the past few weeks, the news has been rife with talk about Greece destroying the European Union — along with its currency, the euro. Greece isn’t going anywhere, mind you… Greek workers are still working and Greek shop clerks are still selling them food and clothing.

But the idea that the euro will somehow go away — or, more likely, be substantially devalued if and when Greece decides that it simply can’t manage its payment terms to France, Germany, and England — has stimulated whole squads of folks stampeding to banks, tobacconists, and loan sharks so as to swap their coins and bills for something a bit more “durable”.

And what they have been running to is the U.S. dollar.

Why on earth would they want to swap a currency that might get devalued for one that has been deliberately crushed by its creator? Because Washington has made vague promises to stop printing so damned many greenbacks sometime in the near to distant future.

Will the Politicians Sober Up? Get Real!

Let’s step away from the whole memetic argument for a moment to address the probabilities of the euro vanishing tomorrow and Washington stopping its maddened printing binge.

The answers are: thin and thinner.

European lenders — primarily the Germans — just want to see the Greeks hurt a bit. It’s a moral thing: Those lax Mediterranean types simply can’t be allowed to have but so much fun without paying the piper.

But in the end, they will find a way to make it all work because the mechanical aspects of reconstituting the old Deutschmark are far more expensive than giving the Greeks a few more years and a few less percentage points on their loans.

And here in the States, we are facing a far greater crisis: We have dug a multi-trillion dollar debt hole 30 times deeper than Greece’s. And Washington only has one hope for paying it off: inflation.

Collateral Damage

Regardless of any sort of promises they make, the ONLY way Washington can attack this debt bomb is by printing a boatload of dollars.

This has an obvious effect: They don’t have to earn the money if they just invent it out of thin air. But the second effect is more insidious… By cranking out greenbacks faster than the economy can absorb them, it causes our faith in the value of this currency to diminish.

Why would any government shoot itself in the foot like that? Because it reduces value of the greenbacks it owes, in essence reducing the size of the loan itself down to something vaguely manageable.

Of course it also cuts every dollar you and I are holding in half, but that’s just collateral damage as it were.

Trackable and Predictable

But all that economics stuff only really matters when it gets memetic traction, when folks BELEIVE that it matters.

Just last week, I was chatting about this with my friend, Chris DeHaemer. I told him it was a lot like airplanes. They only fly because everyone on board believes that they will. And should anyone have the slightest doubt…

He pointed out that he was about to spend 19 hours on a plane flying to Nairobi, and asked me to please shut up.

The point here is that memetic belief is both trackable and predictably cyclic.

Dollar Faith Peaking
Dollar Index Turning CornerHere, for example, is the chart (click images to enlarge) for the Dollar Index (DX), showing the daily ebb and flow of relative faith in the greenback.

For the past year, it has been locked into a downward trend. Even the past couple of Greek eruptions have only managed to drive the greenback to the top of that channel before we see a cyclical swing back to the norm.

And while the dollar has been rising a bit recently, it is fast approaching the cyclical tipping point.

In all probability, the DX will not exceed 76.85 before tipping over and sliding back down toward 74.

Too Chaotic at the Top

Now, I can easily understand as to how a body might be tempted to ride this pending turnaround. However, I should point out that both sides of this equation are subject to all sorts of mischief.

These tipping points are delicate moments, and the memetic flow here is being heavily influenced by the bull coming out of politicians’ mouths on both sides of the Atlantic.

Fortunately, I’ve got a better idea for you…

The Golden Mean(s)

When you consider that both European and American players seem bound and determined to push their currencies lower, the better bet is to ride that favored alternative to all currencies: gold.

Fortunately for us, gold is just as much an idea as any currency out there.

Yes, yes, I know this is a heresy in this particular column. Don’t bother writing in, as I am too damned old to change my mind about this. However, I will grant that this particular meme has been in circulation so long, it almost rivals sex or food. Gold Heading for the Top

A Better Way to Play

Be that as it may, faith in gold is just as trackable and just as cyclical as any other meme.

And when you take a gander at the chart for, say, the SPDR Gold Trust (NYSEArca: GLD), you can see that price has already turned the corner at the bottom of the midterm rising trend and is striking upward through $153.61 (+4.26%) on its way to $153.61 (+$9.12%).

Here’s how to turn the fantasy into cold, hard reality…

As I sit to write, GLD July 146 Calls (GLD 1116G146) are trading for $4.70, with a posted Delta of 0.6139.

Should the GLD strike the first of those targets, you could expect these contracts to rise to $8.25 for gains of 75.50%.

Follow through to the top of trend at $160.78 would push that to $12.65 for gains exceeding 169%.

Take care,

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Adam English
Editor, Outsider Club

follow basic @AdamEnglishOC on Twitter

Adam’s editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor’s page

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