Rising commodity prices imply a weaker dollar and that is where I am stuck. I would have fallen in with Schiff, Jim Rogers, Faber, et al that called for a collapsing dollar months ago. According to monetarist theory dropping the interest rate alone should weaken the currency. Printing dollars with a falling GDP alongside this should mean a double whammy. But so far we have *de*flation (ok, severe disinflation, bordering on deflation) not inflation. And no one can deny the money supply has gone exponential and interest rates can’t go any lower practically speaking.

The folks calling for a weak dollar are also, naturally, calling for gold to rocket. This obviously hasn’t happened either. Gold has been range bound for months and cannot seem to stay above $1,000 for more than a trading session or two.

My view on gold is that it is no longer trading like a currency analogue. This may change, but for the last few years at least gold has traded like any other commodity. I believe this is because the majority of traders no longer perceive gold as a viable currency alternative. Most folks trading today were just kids in 1970-1980, the last time gold was trading as a currency hedge.

So for the time being the dollar is the currency of last resort, not gold. I am aware this will likely change at some point and the minute it does I am jumping into gold and mining stocks with both feet, as I think the transformation could be quite rapid. Until this new state of mind vis-a-vis gold occurs I believe the dollar will remain strong no matter what its theoretical supply or what interest rate the Fed sets.

When the perception shift does occur, and I think this very likely, gold (and silver) will take off with a bullet.

This is why I don’t see the dollar as a strong currency longer-term. There are problems here though:

Asset markets can remain artificially high for years. Look at JGBs. Who would think the Japanese could keep rates so low for so ong given the massive increase in debt.
All other central banks seem to be printing money too — at least the Swiss and the British are. And the ECB seems to have joined the party as well. While this all speaks to gold rising, it does not necessarily speak to a low dollar or yen
Who could benefit? The commodity currencies like the Norwegian krone or the Loonie and Aussie and Kiwi dollars, the Rand. But, again, this is problematyic because those economies are small, relatively speaking. There is a premium for liquidity. And I noticed the Norwegians recently said they don’t want people speculating in their market for that reason.

All of this speaks to the difficulty of figuring out what currencies are going to do. In my mind, hard assets are the only thing to gain in such an environment. Thoughts?

Yet the dollar has not collapsed. Nor has the Yen, despite Japan’s 15-year long quagmire in a similar mess. (Their CRE collapse occurred back in the early 1990’s). This reminded me of Peter Drucker’s claim back in the ’80’s that the finance markets had decoupled from the real economy. History proved Drucker wrong, but could we be seeing a similar decoupling between GDP and currencies? Again history may prove me wrong, but the Yen and Dollar strength as compared to the health of the Japanese and US economies do seem to support this view in light of current events. At least in this observer’s opinion.