US Dollar Sits on Brink of Collapse

03/22/2011 1:00 am EST

Focus: FOREX

The violation of a critical cycle low could confirm that a full-blown US dollar collapse with major implications for stocks, commodities, and the global economy is about to begin.

By Toby Connor

For months and months, I've been warning traders and investors that the dollar was going to come under extreme pressure sometime this year. I expected it to probably happen in the spring. Many people thought I was nuts. They were sure it was the euro that would collapse, despite the fact that the European Union (EU) is doing everything they can to protect their currency while Bernanke is doing everything he can to destroy ours.

Last Friday, the last confirmation occurred to signal that the final collapse is now underway. On that day, the November yearly cycle low was violated. Cyclically, this event is a major catastrophe, even if it gyrates up a bit in the next few days or weeks.

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We are now going to see the dollar get absolutely hammered for the next couple of months. The viability of the dollar as a currency will be questioned. There is a decent chance it may start to lose its status as the world's reserve currency. (Coincidentally, about the time everyone becomes convinced the dollar is going to hyperinflate, that will be the point where the three-year cycle low will bottom and we will see an explosive rally, along the same lines as what happened in the latter half of 2008.)

This is what all the top pickers in gold and silver fail to understand. They are all trying to call a top based on charts without any understanding of what is happening to the currency. 

In a currency collapse, the market will flee into assets that will retain their purchasing power. Four weeks ago, we went past the point of the stock market being able to protect us from Ben's printing press any longer. So buying stocks as protection is no longer a viable solution.

Four weeks ago, spiking inflation rose to the point where profit margins are now being hit. Ben will no longer be able to prop up the stock market by further debasing the currency. Stocks have now decoupled from their inverse correlation with the dollar and will now follow the dollar down.

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The more Ben prints and the faster the dollar collapses, the faster the stock market is going to fall...and the quicker the economy is going to roll over into the next recession.

What will happen is that liquidity will rush into the commodity markets as the only true protection against the accelerating currency crisis.

This is why one has to ignore the “Here’s the top” pickers and chartists. Overbought oscillators and stretched conditions are meaningless in a currency collapse. This is all about fundamentals. It's about protecting your purchasing power. You can't do that by exiting the one sector fundamentally best suited to protect you during this storm, which are the precious metals.

Now isn't the time to be selling your gold, silver, or mining stocks; it's time to be buying more. 

The next six months will see a real currency crisis, with a final parabolic spike in gold and silver (C-wave finale), and an inevitable crash (D-wave correction) that always follows a parabolic move. It is only then that I will position myself long again at the bottom in preparation for the next major wave up in gold.

By Toby Connor, trader and blogger,

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