The US Dollar or Silver: Place Your Bet
12 May 2020
Over the last 50 years there have virtually been no significant Silver rallies during a period when the US Dollar index has been rising.
If you are betting on a massive Silver rally while US dollar strength continues, then you have a very low probability of success. Similarly, if you bet on a massive Silver rally while the US dollar continues a long decline, then you have a great chance of success.
So, for the Silver investor, what the US Dollar index might do over the coming years, is a very important question to answer. No surprise here, since the US dollar has been 100% debased (of Silver).
There have been two significant Silver rallies in the last 50 years (marked out with rectangles on the chart below). During both of these, the US dollar index was in serious decline.
The chart above, shows the US Dollar index vs the Silver Price chart. On the chart, I have marked two patterns (1 to 4) that could potentially be similar, and exist in similar context (just after a major bottom in the US Dollar index).
If the second pattern continues to follow the first, then the US Dollar index will rally significantly over the coming months and years.
If the patterns diverge from around this area, then the US Dollar index could suffer a significant decline to the point 1 area and maybe even lower.
One of the biggest problems with a bullish case for the US Dollar index is of course the recent enormous monetary stimulus. History shows that the US Dollar index is very likely to be weak after such a record stimulus. This is despite the big stimulus by the other big nations.
The index could move sideways in the best case scenario for a strong Dollar, but is very unlikely to make higher highs.
Another big problem is time. If the US Dollar index is to move higher than the black line (by point 2), then it would establish the longest bull market for the US Dollar index since Nixon took the US of the gold standard. This, in my opinion, makes a US Dollar index rally very unlikely.
Despite these reasons and more, there are many that have the expectation that the US dollar will continue higher, especially given the current economic distress and the massive deflationary pressures that it created; and with good reason I would say.
This then sets up the ultimate standoff in the market, where the resolution will be huge, when it actually happens (either way). This is the kind of reaction I would expect Silver to have in any case, in a proper bull market. Not a slow gradual rise, but a very violent move higher.
The standoff is exactly manifested on the Silver chart. The next move will be big and it is coming soon. We are exactly in the terrain that is conducive to massive Silver rallies.
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