Dear America, We’ve Had Our Fill of Dollar Assets. Sincerely, The World

By: Justice Clark Litle

Aug 31, 2020 | Investing Strategies

Something interesting and exciting — and profoundly bullish for precious metals and Bitcoin — happened on Thursday and Friday of last week.

To explain what happened, and why it’s a big bullish deal, we need to walk through the chain of events.

On Thursday, Aug. 27, Federal Reserve Chairman Jerome Powell gave a historic speech from Jackson Hole, Wyoming, live-streamed over the web, about changing the Fed’s inflation mandate.

To briefly summarize the key point, Powell said the Federal Reserve would be OK with inflation rising above 2% for a period of time.

That sounds like a small thing, but, in the context of long-term policy shifts, it is a very big deal.

After Powell’s speech, the U.S. Treasury market sold off hard. The 10-year note and 30-year bond saw significant price declines, causing the 10-year and 30-year yields — which have a mechanical inverse relationship to the bond price — to shoot higher.

This made us say “Uh-oh.”

It was a worry because falling bond prices, and a corresponding rise in bond yields, are seen as bad for precious metals, and bad for inflation plays in general (the type of assets that benefit from a weakening dollar).

That is, in part, because rising yields are associated with a tighter credit environment, a “risk-off” investor attitude, and a strengthening dollar.

As it so happens, the TradeSmith Decoder portfolio has been stuffed to the gills for a while now — literally pressing the limits of maximum leverage the portfolio is allowed to have, across 20 separate positions — with bullish inflation plays in the precious metals and crypto space, along with an assortment of bullish equity winners like Amazon (AMZN) and PayPal (PYPL).

Our aggressive exposure level had us worried about the possibility of a correction, or the risks of a suddenly strengthening dollar, or a short-term drop in precious metals stocks and Bitcoin.

And so, when the bond market went into sell-off mode as a result of Powell’s speech, TradeSmith Decoder took partial profits on our positions in Bitcoin (BTC/USD) and silver (SLV).

To be clear, we still have plenty of Bitcoin and silver on the books as of this writing, via large-sized core positions established in March that are up 85% and 108%, respectively, as of the Aug. 28 close.

But when the bond market sold off, we cashed out some profits from the add-on legs of our Bitcoin and silver positions — pyramid positions we had purchased in April and July, respectively. Those got taken off the table.

After booking partial profits, we took a “brace for impact” stance. How hard would the bond sell-off hit the precious metals portfolio? How much would the dollar spike? We were prepared to weather some turbulence and expected the ride to be bumpy.

But then something surprising happened. Even though the bond market sold off on Thursday, precious metals did not follow suit. Gold and silver and Bitcoin were weaker at first, but then the weakness disappeared. And the dollar didn’t rise.

By Friday’s close, it was the dollar that had weakened, not precious metals. Gold and silver pushed higher again, Bitcoin held its own, and it was the dollar index showing new weakness.

This is potentially a very, very big deal.

Why? Because it suggests that the U.S. dollar is now under heavy selling pressure, as a result of U.S. Treasurys getting sold.

To put it differently, if the dollar fails to rally even when U.S. Treasury bonds sell off hard — and if gold, silver, and Bitcoin can rise in value, or just maintain a steady position, when yields are going higher — then that is a hugely bearish outlook for the dollar, and a hugely bullish one for gold, silver, and Bitcoin.

Our suspicion is that something powerful and historic is happening now. This could be a big-picture trend change that makes the dollar fall lower and lower — in an epic multi-year downtrend — for many years to come.

Earlier this summer, we shared the following chart. Keep in mind — the chart below, shown as an example of our thinking, is a few months old now.

trade-weighted U.S. dollar index chart

When we posted that chart a few months ago, we said the following two things:

  • In March 2020 the U.S. dollar experienced a “key reversal.” It broke out to new highs, and then immediately reversed and declined sharply.
  • The dollar is now testing support at a 10-year trend line. If it breaks that trend line, the dollar could go into freefall.

Now it’s a few months later, and we can look at that same chart — updated as of Aug. 28 — below. See if you can spot the main difference:

trade-weighted U.S. dollar index in freefall

As you can see on the right side of the chart, the 10-year trend line for the trade-weighted dollar index has been definitively broken. The dollar’s value has been declining for weeks on end. As we anticipated, “free fall” has commenced.

Now, this wasn’t just an editorial call or commentary on a chart. It was part of our rationale, as shared with TradeSmith Decoder subscribers via portfolio commentary and a special report, for declaring it was “the best time to buy gold stocks in 90 years.”

And it was, and so we did (along with silver stocks), and the positions have performed excellently.

But coming back around to Aug. 27, and the Powell speech, and the big events of last week, we had grown nervous about the prospects of a dollar snapback rally.

Precious metals and precious metals stocks had gone up, by a lot, and the dollar had gone down in recent weeks, by a lot.

So we had to wonder, what happens if the dollar runs higher, and precious metals go into correction, as a result of falling bond prices and rising yields?

When this failed to happen — when bonds sold off and yields rose, but the dollar weakened anyway, and precious metals (and Bitcoin) stayed strong anyway, we realized an even bigger change could be afoot.

The world could be dumping its excess dollar assets. Central banks all over the world could be shedding dollars and U.S. Treasurys.

And this trend could be reinforcing itself to the point where the dollar has trouble going higher, under any circumstance, on any news at all.

To reiterate a point we’ve pounded the table on, holding U.S. Treasurys is a bad idea at this point.

The Federal Reserve has all but admitted it plans to inflate away the excess value of the debt. This means that holding U.S. Treasurys, on balance, has now become a way to lose money over time. You lose more from inflation than you gain from the microscopic interest payments. For every $10,000 worth of 10-year notes you hold, $75 per year in coupon payments could be eroded by $100 worth of purchasing power loss, and so on.

For foreign holders of U.S. Treasurys, the picture is even worse with a declining currency added to the mix.

INSERT AD 3

If you are a non-U.S. entity holding U.S. Treasurys as a reserve asset, even as the value of the U.S. dollar declines, you are getting double-whacked by purchasing power losses and currency depreciation losses at the same time!

What could this mean in the big scheme of things? It could mean a big, tidal shift toward the selling of U.S. Treasury holdings, and the selling of dollar assets, on the part of the world’s central banks.

That could mean a dollar downtrend that chugs along for years, from all of that relentless selling.

It could mean that, day after day, the dollar just keeps getting hit with more supply, as the world’s central banks keep drip, drip, dripping their excess dollar assets onto the market.

Part of the problem is that the world’s central banks have been overweight on dollar asset holdings for a very long time.

As such, this isn’t necessarily about getting to zero dollar holdings — it is more about going from “overweight” to “normal weight.”

Let us say, for example, that the average central bank has about 60% of its reserve currency holdings in dollar assets.

If that central bank decides to go from 60% dollar assets to 50%, it has to sell off more than 16% of the dollar holdings that it owns, just to get to a place where dollar holdings are half the pie instead of more than half.

Now if a whole bunch of central banks decide to sell off their excess dollar assets at once, that creates huge long-term pressure on the dollar.

It means a monster overhang of readily available dollar-asset supply, thus weighing the dollar down, day after day.

And again, these managers have every reason to lighten up on dollar assets, if not sell them off entirely.

They have to know the Federal Reserve has all but promised to inflate away the real value of U.S. debt. And it is highly likely that the U.S. government is going to spend trillions, perhaps many more trillions, in the years to come. 

This is very exciting for precious metals, precious metals stocks, and Bitcoin because, for a number of weeks now, investors have been increasingly nervous about the prospect of a U.S. dollar spike, and a big price correction in the precious metals space.

But if it dawns on investors that, hey, wait a minute, the world’s central banks are now sick of U.S. Treasurys, and are selling their holdings, and that constant stream of overhead of dollar-asset supply means the dollar can’t even lift its head up, then guess what that means.

It means gold, silver, and Bitcoin should be going higher. A lot higher. Not next year, not next quarter, but very soon, if not immediately.

It also means the doors are opened up for another big trend run, one that could take prices (and profits) to a whole new level.

If we are witnessing a historic shift in which the world, on the whole, decides it has had its fill of dollar assets…

 And if the world now decides to collectively sell dollar assets…

Then that means the U.S. dollar could keep trending down, and down, and down, possibly for years, from current levels.

And that is one of the most bullish forecasts for inflation plays (like gold, silver, Bitcoin, and precious metals stocks) that one can imagine.


Related Articles