New Cycle Could Spell “Crisis” for US Dollar

11/16/2011 6:00 am EST

Focus: FOREX

A new cycle low in the CRB index and the near-topping pattern seen in the dollar index could give way to a full-on currency crisis in the US if the dollar fails to hold above the key October low.

I actually hope I’m wrong on this one, but I think the Commodity Research Bureau Index (CRB for short) just put in its three-year cycle low in October. I’m also afraid that (Fed Chairman) Bernanke has done irreparable damage to the US dollar. If I’m right about both of those assumptions, then we are on the brink of an historic inflationary period.

I’ve marked the major three-year cycle bottoms in both the CRB index and the dollar index on the chart below with blue arrows. (Actually, the CRB cycle tends to run about two-and-a-half years, on average).

chart
Click to Enlarge

The dollar is now at great risk of forming a left-translated three-year cycle. A break below the October 27 intraday low would initiate a pattern of lower lows and lower highs of an intermediate degree. When the intermediate cycles start to roll over, that is usually a sign that a major cycle has topped.

If the dollar’s three-year cycle has topped after only five months, we will be at great risk of a severe currency crisis in the fall of 2014 when the next three-year cycle low is due.

Even more concerning is if the CRB cycle has bottomed. If it has, then commodities are poised for a huge surge higher during the next two years as the dollar deteriorates. 

NEXT: The Critical Level the Dollar Must Hold in Weeks Ahead

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The next couple of weeks are going to be critical for the dollar. Sometime in the next two weeks, the dollar is going to drop down into its next daily cycle bottom. On average, that cycle lasts about 20 to 25 days. Monday will be the 12th day of the cycle. The reversal last Thursday has the potential to mark the daily cycle top. If that top holds, then the dollar is at great risk of moving below the October 27 intraday bottom sometime in the next two weeks as it moves down into its next daily cycle low.

chart
Click to Enlarge

The dollar must hold above the October 27 low. Failure to do so would indicate that the cancer has now infected the currency markets, most specifically the US dollar. A penetration of the October 27 low would indicate that the current intermediate cycle topped in only two weeks. That should potentially lead to another 15-20 weeks of generally lower prices on the dollar index with the next intermediate degree bottom due sometime in early- to mid-March.

If that scenario plays out, we are almost certainly going to see the CRB index break its downtrend line, confirming a major three-year cycle bottom has been formed.

chart
Click to Enlarge

The extremely mild nature of the decline so far is a serious warning sign that QE1 and QE2 are going to eventually trigger massive commodity inflation.

At this point, all we can do is hope that the three-year cycle in the CRB will stretch slightly long and bottom early next year. If it fails to do so and the major three-year cycle low did occur in October, then we have some serious inflation heading our way in the next two years.

More importantly to precious metal investors, if the dollar’s three-year cycle has already topped, then there is a very strong possibility that the next two years—as the dollar collapses down into its 2014 bottom—will drive the bubble phase in the gold bull market.

By Toby Connor of Gold Scents

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