Where's the Bubble?
Article originally submitted to subscribers on 3rd November 2006.
The Biggest Bubble in existence today is not in Housing and it's not in Equities.
It's in Debt!
Credit is probably the easiest it's been since you were alive.
Credit could very well be the easiest it's EVER been in History.
The Real reason that credit has become so big is because most people think it Can't Fail!
As long as you can service your debts, as long as you stay in your job, the more complacent you become.
But make no mistake; this is a TRICK OF CONFIDENCE.
When the myth evaporates, as it will, the slide in confidence will be so quick and so devastating it literally will be Unbelievable!
Economic cycles have existed since the beginning of time and will continue to exist long after your and I leave this world.
In last weeks article Perspectives of a Gold Stock Bull market I explained why Long Term interest rates will be heading higher in the coming months and even years. I also showed how rising long term rates have and will continue to cause a collapse in housing stocks.
Higher interest rates will ultimately burst the debt bubble in a most Horrible way!
But with all of this going on, the biggest indicator of Confidence has been exceptionally solid. And here I'm referring to the US Dollar:
Chart 1- US Dollar Weekly
Is the US$ topping out or is it preparing to move higher?
I tell you, I've looked long and hard at the chart and think a case could be made either way!
On the Bullish side:
The Dollar has been consolidating in a range since Jan 2005. A second but higher low was made in May 2006 and since then the Dollar has been trending higher.
So long as the Dollar remains above 83.50 the chart remains Bullish.
On the Bearish side:
Over the last 3-weeks the Dollar has moved to the bottom of its rising channel. A break below lower trend line will complete a reverse flag formation (Green F). The target for this formation would be around 78 on the USD Index. That would be an ALL TIME Low.
The initial downside to watch is a break below 85.00 (we are currently close at 85.35).
Then the old low of 83.50
And finally a break below major resistance at 80 (not shown) would in no uncertain terms be CATASTROPHIC.
Which way do we go?
I personally suspect we will be heading down. But why speculate, we will find out very soon.
A rising Dollar and rising interest rates will put pressure on the Gold market and cap this short term rally we now experiencing.
A rising Dollar indicates confidence in the currency and Rising interest rates increase the probability that the Fed will raise short-term rates in an effort to combat increasing inflation expectations.
A falling Dollar and rising rates will signal confidence has been lost in Debt and Paper. That's a scary proposition but one I believe we are fated for. Under such a scenario a fire will be lit under the Gold market.
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