Gold, Silver, and Bitcoin Breaking Out: Keep Your Eye on the Dollar

Regardless of what you like to trade, you need to pay attention to currency movements. The so-called King Dollar has a profound impact in stocks, bonds, commodities, and cryptocurrencies. In fact, you can become a much better investor simply by studying the U.S. dollar.

It’s no coincidence that gold, silver, and cryptocurrencies like Bitcoin are all staging massive breakouts at the same time. The common thread between these asset classes is that they’re all measured against the dollar, especially if you’re trading them in the United States.

Even if you’re not in the U.S., the dollar remains the global measuring stick because like it or not, it’s the world’s reserve currency. The dollar’s dominance is imperiled as the U.S. government is $26.5 trillion in debt and will obviously never pay that back.

So, debt notes issued by a government that can’t be trusted to repay its debts won’t hold much value in the coming years. As China buys up more of the world’s debt along with its properties, it’s conceivable that the yuan or renminbi could overtake the dollar as the world’s reserve currency.

Or, Bitcoin could be heir to the currency throne as it’s universally recognized, fungible, and anti-inflationary. Still, the dollar’s replacement won’t happen overnight as traditions and old habits die hard. So, we’re stuck with it for the time being – but savvy investors can use this to their benefit.

In order to capitalize on the dollar’s deterioration, one has to pay attention to what’s going on at the top levels of government. For instance, after a lengthy delay, Republicans in the U.S. Senate just rolled out a coronavirus relief bill proposal worth roughly $1 trillion.

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U.S. Dollar Index. Courtesy: Quantum Economics

By all indications, the actual bill that gets put into law could be worth much more than $1 trillion. In May, the Democrat-controlled House of Representatives passed a relief bill with a $3.5 trillion price tag.

Politicians on both sides of the political aisle are eager to pass a stimulus bill because $600-per-week addition to Americans’ unemployment benefits, which was approved in March, will expire soon. No one in Congress wants to be blamed for cutting off the lifeline for so many American families.

At the same time, the Republicans have proposed sending out another round of $1,200 checks to Americans. Expect lots of political wrangling, posturing, and grandstanding until the politicians are in the 11 inning, at which time they’ll be forced to work together to agree to a dollar figure with lots of zeroes.

It’s the perfect storm for a crushed dollar, which makes non-inflationary assets look better by comparison. Ever since President Nixon, under Henry Kissinger’s advice, decoupled the dollar from the gold price in 1971, the value of the dollar has declined steadily and that’s been a blessing for gold and silver investors.

With the advent of fiat money, governments were now able to print their currency units at will and without limitations. Yet, it’s only recently that we’ve seen the printing press cranked up to 11. The future means little to politicians with reputations and careers hanging in the balance.

Courtesy: The Economist, Quantum Economics

The upshot is a long-awaited bull market in gold, which is smashing through the previous record high from of $1920.70 from the year 2011. Even more exciting is the move in silver, which is breaking through $26 as I’m writing this.

Bear in mind, though, that silver can run much farther than that. In 2011, silver rallied to a peak of $49.82 per ounce. And from 1979 to 1980, when inflation was a major problem in America, silver briefly traded over $50 per ounce.

During those two previous silver peaks, the U.S. government wasn’t printing and spending money nearly at the rate that it’s doing in 2020. All of a sudden, the calls for $5,000 gold and $100 silver don’t seem so crazy now, do they?

At the same time, Bitcoin, which had been magnetized to the $9,000 level for months on end, jumped to $11,000 seemingly without warning. Yet the signs were all there, plain as day for vigilant dollar monitors and government watchers – and soon enough the world will come to understand that knowledge, and not the dollar, is king.