Devastating Dollar Short-Squeeze Is Gathering Steam

The Dollar Index has blasted through key resistance at 80, threatening to “unwind” carry-traders who borrowed dollars for next to nothing in order to speculate on other assets. Chief among those assets is gold, which got savaged yesterday in a $100 selloff that seems hell-bent on testing September’s key low. The low lies at 1543, basis the Comex February contract, but we doubt that it will hold. In fact, earlier, we had told subscribers there was a 60% chance that February Gold was about to dive to at least 1459, a technical target derived from our proprietary Hidden Pivot Method.  We shall see. In any event, gold and silver –  as well as crude oil, the euro and the commodities complex– will come under heavy selling pressure if the short-squeeze picks up steam. If you’d like access our specific price targets for all of these trading vehicles in the days ahead, click here for a free trial to Rick’s Picks.

Concerning the U.S. dollar’s powerful surge, although it was driven initially by fears over the possible collapse of Europe’s financial house of cards, the rally has taken a life of its own that is being driven by dollar short-covering. The buying is not yet at panic levels, but a surge will be impossible to stop if it gains juyst a little more momentum. Although the central banks can affect the markets for a short while with talk of bailouts, all of them acting together are puny relative to the quadrillion-dollar juggernaut that is about to fuel an unwind of the dollar carry-trade. Over the years, we’ve written many times about this potential Mother of All Short Squeezes. The paradox was, and is, that the dollar is intrinsically worthless, a form of debt rather than money. In point of fact, as we have pointed out here numerous times, the $20 bills in your wallet are worth no more, fundamentally, than the $1 bills.  Even so, that’s not going to help the Masters of the Universe who borrowed dollars promiscuously in order to leverage them to the sky.

Threat to Europe

From a technical standpoint, we’ve been expecting the NYBOT Dollar Index to hit a Hidden Pivot rally target at 81.11 and then back off. The surge is closing on that number now, up from around 75 in late October. But if the pivot resistance gives way easily — and especially if buyers re-energize the rally by pushing above the 81.44 peak recorded last November – the central banks and all those who are short dollars are in for some very rough sailing.  So will those who have been betting on a politically-induced rally in the euro. Our immeidate downside target for the March 2012 contract is 1.2556, and we expect it to hold, at least for a while. If not, the fragile credit edifice that has been holding Europe together is all but certain to crumble.


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  • buck novak December 16, 2011, 6:33 pm

    This is great news. I want to squeeze those rats in the government till they beg for mercy. They create this cesspool. Now they can live in it. This is a revolution that is going to be a pleasure.

  • mava December 16, 2011, 7:49 am

    Two thoughts:

    – The Europe isn’t evidently crashing just yet. When it does, I expect even bigger dollar high. So, this one is nothing yet. Volatility is good though, cause that is where money are made in trading.

    – One of these days, the feds will have to enact currency controls. Now, if you had to do it, would you do it when everyone is out of the dollar or when everyone is in the dollar?

  • Randy December 16, 2011, 1:07 am

    The real battle line here is between gold and everything that isn’t gold (i.e. fiat currency). The modern day Roman Empire has only paper promises to back their attempt at owning everything, whereas normal people have land, labor and substance. If you were them, you would pump up the dollar to lower the price of gold too. Perhaps as a last desperate effort. Whenever something seemingly irrational happens, this views seems to make it all make sense. GS is massively short GLD, or so I have heard. If it goes up too much it sends Goldman in BK and thus ends the reign of fiat currency.

    It would not surprise me to see gold at 1200 and run into a wall of physical buying. Bull markets in commodities seem to have a down year 1 out of 12-14 years.

    Martin Armstrong writes of bankers that change the rules to assure themselves of the perfect trade. An unwinding of the dollar carry trade in gold after Bernanke just assured us a cheep plentiful dollars that are now gonna be ever more expensive in a Euro crisis would seem to fit the bill. Promise one thing, do the opposite. Heck of a deal. No way to loose.

    Add a surprise rate increase just as the unwinding stalls, now THAT would freek’n awesome if you were them.

    If it serves to lower gold’s competition, chances are this move will last if it last more than a month.

    I knew one trader that made a living trading “good news, bad price action” because the rare time it happened and didn’t snap back to go in line with the news, it went and went and went in the contrarian direction.

    With massive dollar creation who wouldn’t expect inflation to push gold up?

    Before the massive 1979 gold spike, there was a few years it retraced 30-40% before the inevitable high.

    Then again, maybe I’m all wrong, and there aren’t mega billionaire bankers that only want sure deals on a scale they can participate in.

  • Alvaro de Orleans-Borbon December 15, 2011, 11:11 pm

    I wish to recognize the contribution of “Diverging Opinion”.

    Having carefully read his arguments about the coming PM price collapse, I acted upon them and did quite well.

    I hereby wish to thank him with these words.

  • wally b December 15, 2011, 9:29 pm

    does anybody have any idea of what happens to the u.s dollar , gold , stocks etc. if the goverment shuts down tomorrow.

  • gary leibowitz December 15, 2011, 8:04 pm

    Predetermining the outcome of stocks and commodities is not the best way to trade. Let the market trend tell you. Simple statement but most ignore it. I for one have always thought the dollar would do well in a deflationary environment. Since the EU is where we were 3 years ago I see no reason the dollar doesn’t hold up.

    I feel the year end equity rally is being held up by the strong dollar. Same is true for Gold. Perhaps some good news from the EU could jump start the much anticipated yearend rally.

  • C.C. December 15, 2011, 6:23 pm

    “In other words, debt default deflation, until the Fed turns the monetary spigots on again.”

    Precisely what they have in mind. Before the engines can be re-fired, it must be shown that the ship cannot sail on wind power alone.

    I think 2 or 3 Fed governors are leaving early next year, to be replaced with more accommodative types if I’m not mistaken. The timing could be serendipitous –

  • Bob December 15, 2011, 4:59 pm

    Out of all the gold and silver that was supposedly sold this week, I wonder how many actual ounces changed hands?

    These paper markets are a manipulated joke.

    • Robert December 15, 2011, 6:27 pm

      HFT has transformed the markets so that prices seek the zones of maximum volitility , instead of seeking the zones of maximun buyer/seller equity.

      Rigged or not, it is certainly not the way fair human markets are supposed to behave.

  • Tech-trac December 15, 2011, 3:36 pm

    Funny how Equities,AU ,Oil & the CRB detect yet another ‘whiff of deflation’ & yet yield spreads @ 128bps remain below their recent hi’s of a few months ago (144bps). They haven’t even taken out the recent hi of a week ago.
    Haven’t seen any TED spread chart as yet, but I would be interested in seeing if it has budged at all .
    Risk off may be the current flavor of the ‘weak’ in most mkts but it isn’t shared by their risk-averse counterparts in the corporate bond mkts.

    • Cam Fitzgerald December 15, 2011, 4:09 pm

      I was just looking at the Ted spread actually and was a little amazed that it has almost quadrupled since August. Now sitting at .55 thereabouts. Move along folks, nothing to see here. Just a small fender bender in progress. It hurts less if you don’t look.

    • Robert December 15, 2011, 6:21 pm

      Agree with Tech Trac… This is a massive, January 2009 style smoke screen…

      The people who are the most short dollars in this world are the 20+% of Americans who are unemployed. How exactly does a dollar short squeeze impact them? And how exactly would a strengthening dollar improve the likelihood of improving employment?

      Perhaps no one here is paying attention, but Holiday retail sales are sucking wind, seasonal employment opportunities are next to nil, and many companies (most notably large commericals and financial services) are reducing full time staffing levels- right at Christmas time- Ho, Ho, Ho.

      Treasury auctions this week have been well subscribed- seemingly lots of demand… but as mentioned many times by others- this is just kicking the can. Bill Gross was early, but that does not mean he will not be proven right.

      The markets are simply pushing the Fed further into the “print or die” corner.

      If this is a “real” global flight for dollars, and the Fed does not answer the bell, then the Fed might as well close up shop and board up/padlock the Mariner Ecclese building. The Fed serves no other purpose but to debase the dollar. Therefore, the next round of dollar debasement is merely a question of when, not if.

      Gold lease rates are still neagative- I say let the Central banks dishoard ALL of it to the commercial banks and sell the price all the way down to $5… becuse the commercial banks HAVE to return that Gold, or they have to return adequate amounts of currency to buy it back on the open market.

      The hidden gold market is exposing itself as the ultimate provider of QE. Gold gets leased, sold, and removed from circulation. The only way the banks can get this gold back when it is time to unwind the position is to buy it from the producers for cash.

      During a period when the technicals are SCREAMING cash scarcity and deflation delflation deflation, What exactly will the banks use to pay the gold producers…?

      Face it everyone; EVERYTHING is being hoarded. Treasuries, cash dollars, Gold, Silver, ammunition, food, fuel, chopsticks, toilet paper…. you name it.

      I called my bullion dealer yesterday, and the best markup he was offering on American Silver Eagles was $4 per coin. 15% markup, and he said he would be totally cleaned out by end of day today.

  • Rich December 15, 2011, 11:55 am

    Aloha All
    Based on six weeks of Fed monetary base contraction, thinking a fast and furious reflex market tsunami surge, followed by many startled participants swept out to drown at sea with USD targeting 91, +15% from here, sucking life out of most other assets.
    (Click on name for details)

    In other words, debt default deflation, until the Fed turns the monetary spigots on again.

    • Mario cavolo December 15, 2011, 3:43 pm

      …Followed by a continuation of smart money equities buyers on said scary big dip?…seems plausible…

  • mava December 15, 2011, 5:23 am

    Oh wow, that is some great news! Question is, only, how high the dollar is going to be hyped, and how low can we buy gold for. Looks like my kind of trade.

    Since I know the end of this story will be the dollar plunging to zero, the course of action is clear: when the powers that be fancy to pretend something that is not true, prudent sells that. I’ll be watching for more commentary from Rick as for the timing (I am a horrible day trader). Borrow dollar to sell for gold, now is (or coming to it) the time, not when the dollar was low.

    These moments are true gifts from our government to the people. I rarely can say that. What about $1200? Can we reach that far? Last time it seemed to be a bit on expensive side, but now, it would be a true Christmas.

    Like I said, will keep my ears on what you see coming, Rick!

    • mario cavolo December 15, 2011, 5:32 am

      Hi Mava, replied to your China inquiry in previous column…Mario

    • Cam Fitzgerald December 15, 2011, 7:38 am

      Good question Mava. Indeed, how high will the dollar go. I will defer to Ricks skills on the technical side on this one and what I am reading suggests a top is in sight. For now perhaps but nothing is certain anymore.

      By all rights we should have seen a Euro bounce today and a falling dollar at high overhead resistance. That is precisely what I was anticipating but instead the Euro gave way like a knife going through butter and the dams burst.

      It did not to be this way.

      My contention is that Merkel and company were well aware that anything short of good news would cause exactly the situation we now find ourselves in.

      Understand, they are not fools over there in Euroland. They read charts too. All the expertise was available and at hand to warn policy makers that any bad news would drive the Euro well below resistance and therefore bring a very negative outcome for risk trades, for stocks and for confidence.

      In other words, they acted with deliberate skill at an opportune moment to send the dollar higher and radically change the dynamics of expectations in the market. Merkel made negative comments almost exactly as the dollar was peaking at overhead resistance and thus drove it higher still. Seems to me the politico’s have learned new ways to fight back against the ratings agencies, the Fed, Congress and the will of investors everywhere.

      Merkel just gave us all the finger and told us to shove off.

      This was no accident. No error. They knew factually what kind of outcome would ensue with even the whisper of bad news today. What we need to ask ourselves now is “Why”?

      Are the Europeans finally fed up being dictated to by their counterparts in Washington? Are they driving a fresh crisis for their own region to whip everyone in line? Did they perhaps sense an opportunity to defeat inflationary expectations here while seizing a currency trade advantage there?

      I do not know. What I feel more sure of though is that they have set in motion a major change in market dynamics that was not wholly expected, killed the inflation trades like gold and other risk trades, sent commodities running for the hills and damaged the major commodity currencies in the process. What the hell were they thinking?

      Yes, it was quite a day.

    • mava December 15, 2011, 10:01 pm


      What Euro governments are doing is they are trying to make money in the markets, by issuing carefully timed statements, which is no different than insider trading.

      The net result, of course will be that the money they will be able to “make” will be the money that the industry worldwide will lose, so after they waste it on all kinds of government secret bailouts to inefficient banks and corporations there will be a net loss (the part of the money involved that had gone full circle but ended up consumed on non-productive uses along the way).

      Thus, all the better for us! After they are done playing with market and then spending, the crisis is going to worsen, this time showing up more in lack of supply and pushing the prices up.

  • mario cavolo December 15, 2011, 5:21 am

    Much fundamental and technical analysis, including the presidential year cycle indicates the markets will not break to the downside of the wedge that has been forming. The indexes are fast approaching the lower boundary at around 1190 on the S&P and 2200 on the Nasdaq…all any of us can do is wonder which way they will actually go… and let’s not leave out the possibility of a bear trap false break to the downside followed by a resumption of the uptrend on some more news, we’ve seen it too many times and I put nothing past the elite $puppetmasters. With all that said, Rick’s article today well points out the Bak’s sandpile problem which we all face; a USD mother of all short squeezes is just such an example of something that may unpredictably appear and yet is ludicrous on its face, just like oil’s run up 3 years ago to $130…it made no sense whatsoever except in retrospect, yet that’s what happened…

    Cheers, Mario

  • Sd1 December 15, 2011, 4:27 am

    Who bought the bonds? The Fed?

  • John Jay December 15, 2011, 4:10 am

    Good demand for the 30 year Treasury bond today too.
    Looks like our governments “last man standing” policy is working. I think someone at Pimco said the Euro could hit parity with the dollar. You have to buy dollars to buy Treasuries if you are trying to avoid a 30% haircut on your Euro holdings. You can bet there is another MF Global or two out there that is 40 to 1 short the dollar. No problem, just clean out the customers accounts then tell everyone you are “sorry”. That is the government approved procedure when a player gets into trouble it seems.