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What will happen to Dollar-denominated securities if the Dollar goes into a tailspin?

*Dow Theory Letters, Richard Russell, March 17, 2006

“This international explosion in fiat currency is incredible — the world has never seen anything like it.

Yesterday, the US Dollar Index plunged below both its 50-day and 200-day moving averages, a move that gave me pause. And now I’m wondering whether the Dollar Index is going to test its last decline low at 88.”

“Question — Russell, you say that the Fed is locked into a situation in which they must continue to inflate. If that’s the case, isn’t the dollar doomed? And if so, how will the Fed handle that?

Answer — Look, the Fed crowd isn’t stupid. Greenspan isn’t stupid. Bernanke isn’t stupid. They all see the big picture. Ultimately the dollar must collapse. So how is the Fed addressing this situation? The key word is — slowly. The Fed is going to keep the dollar alive going as long as it can, and it’s going to die slowly.

The Fed technique is a balance between raising rates to slow inflation (or at least to give the appearance of slowing inflation) and creating more liquidity, which the Fed hopes will keep the economy from collapsing. But remember, the operative word is “SLOW.” The Fed hopes to keep the process of dollar deterioration going slowly, making the dollar acceptability last as long as possible.

After all, Greenspan kept the dollar alive for 18 years, but during most of his reign debt was kept under some kind of control. But Bernanke has a problem — the US is up to its eyeballs in debt, and the US can’t take too much in the way of rising interest rates. Thus, the dollar is closer to major trouble now than it ever was under Greenspan’s reign.

We’re drawing ever-closer to the time where the Fed will have to create galloping liquidity in order to keep the US economy above water. What would be the tell-tale signs of galloping liquidity (monetary inflation) be? A falling dollar, rising interest rates, sinking bonds and rising gold. At this time, the only hint of trouble is the rise in gold that we’ve seen over the last four years. But I believe it’s very early in the gold bull market. In other words, the Fed still has control of the monetary picture. Nevertheless, the Fed’s control is now more tenuous than ever. That’s because the debt-logged US economy is now more sensitive than ever to increases in interest rates.

To my mind, the whole situation requires some deep thinking and deciding on the part of you and me. How do we position ourselves in view of the current situation? Yes, everything feels fine and comfortable as I write. But underneath we can sense deterioration. Here’s the way I see it — first, I have to resign myself to the thesis that the government is going its own way, and there’s nothing I can do about it. The spending seems to have taken on a life of its own — it’s out of control. And nobody wants to stop it.

I’ve got enough gold so that if there’s a run on the dollar, if there’s a dollar collapse, I think I’ll be all right. Everything else is secondary. My house is “mine,” because I own it free and clear. What securities I own are not on margin. I honestly don’t know what will happen to US stocks and bonds if the dollar goes into a tailspin. The various dollar denominated securities may go down in value, they may even crash, but let it happen, there’s not much I can do about it if the dollar starts falling apart.”

*This information is solely a highlight of the opinion of a third-party publication and is incomplete.  Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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