Dollar Collapse, Why It’s Happening and How You Can Trade It
In 1973 US President Nixon eliminated the gold standard, making the US dollar a fiat currency. This set the stage for an eventual US dollar collapse.
Since the start of 2017, the US dollar collapse has been evident – down 15%.
Fiat currency means that the US dollar is backed by the trust in the US government. Prior to 1973, the currency was actually backed by physical gold, which has a limited supply.
But what would have to happen for the US dollar collapse to take place? More importantly, what can you do to protect yourself and even make profit during that time?
US Dollar Collapse, Visualizing the Downtrend
Before we look at the factors influencing the dollar collapse, we need to look at a chart of the dollar index performance.
This chart shows the US dollar index on a daily time frame.
From a long term technical analysis perspective you can see that:
- Price is down 14.77% since January 7th, 2017 (420 days)
- Price is now at a long term support trendline (will it hold?)
- Fibonacci support confluence is at 88.50, right on trend line
To the technical analysis trader, it appears that we are at a medium term support level. You could very well try to qualify a long trade here, but the overall economic risks are enormous.
We think that a bounce from here to 92.00 would be a healthy dead-cat bounce. This move will stop out a lot of late shorts.
But in the medium term, the 92 would be a great entry point for longer term short sellers and buying will fizzle out.
Overall, in terms of timing the long trade makes more sense. But we fear a move lower to 80.00 over the course of 2018.
US Dollar Collapse – Who Has the Most Exposure to the US Dollar?
Foreign countries own over $5 trillion dollars worth of US debt.
The truth is that US government has been financing it’s heavy spending habits by issuing bonds to foregin countries.
Why did they want to buy them?
Because the US was a high growth market, and the US dollar was the king for international trade.
Recently however, the US has accumulated massive debt loads – and foreign buyers are getting cold feet to continue adding to their massive trades.
The entire debt bubble could pop if there is a lack of buyers. Lack of buying means less cash makes it to the US from outside the country.
Here is a breakdown of ownership of US treasuries by foreign countries:
At this rate, if any of the countries decide to sell their holdings, the others will panic and follow.
This selling would trigger the US dollar collapse. The entire stock market will crash under this scenario. Everything will sell, hard.
But what could trigger such an event?
US Dollar Collapse – What Needs to Happen to Trigger Selling?
Emergence of China economy & Europe:
If China’s economy continues to grow at the current rates, they will surpass the United States as the largest global market by 2020. The largest world economy drives the most investor interest. Under this scenario there would be a massive demand for Chinese Yuan currency. Investors would sell US dollars to buy the Yuan, triggering a big sell-off.
Massive US Debt (already happening):
The United States has surpassed $20 trillion of national debt. Truth is that the US is broke, and has to continue to issue more and more debt, at a higher cost to continue attracting over-leveraged buyers. Government budget continues to run at a deficit and is increasing at alarming rates.
Higher Interest Rates (already happening):
The Federal Reserve continues to hike interest rates in 2018. There is an expectation for 8 consecutive interest rate hikes through the end of 2019. Higher interest rates make debt harder to service because the payments grow larger. So what do you do? Issue more expensive debt to pay the interest on your old debt. That’s a certain and helpless path to bankruptcy.
Bond yields are exploding higher as a result, with the 10 year US treasury bond now trading near 3.00%! That’s scaring many bond investors, and forcing them to sell their bonds – which is why bonds are crashing.
Another Stock Market Crash:
Another stock market crash would force large foreign countries to start selling their assets to avoid big losses. In the process of selling their long US dollar positions, this would trigger more panic selling, which in turn will push the US dollar lower.
This is the real reason that institutional traders are so afraid of a stock market crash. The next crash will be the largest we have ever seen.
US Dollar Collapse – How to Protect Yourself? (And Even Profit in the Process)
Under a us dollar collapse scenario, stock markets will also crash. But not everything will go down, in fact some asset classes will do amazing.
Gold is a great safe haven, and lots of institutional traders will start buying it seeking a safe parking spot for their capital. Learn more about trading gold by clicking here>
Here is a comparison of gold price against the US dollar, which shows the trend shift is already undergoing:
US Dollar Collapse – Take Control Of Your Finances, Protect Yourself
If selling starts to hit the US and the US stock market, you can expect gold to shoot up just as quickly.
Imagine money leaving all equities, and simultaneously heading all into one asset – gold?
Prices will rally like Elon Musk’s SpaceX rocket ships.
One way to protect yourself as an investor and trader is to get educated.
Learn how to manage your own money.
Financial advisers will be on the wrong side of the trade, and so will the big banks that sold you mutual funds. The only person that will manage your money to your best interest is you. You earned it, you are in charge of growing it!
If you are interested to learn how to protect yourself in a US dollar collapse scenario, I urge you to subscribe to our Swing Trader package here. We provide you weekly analysis and keep you posted on how to position yourself for current and future market conditions.
We analyze the institutional order flow, so you don’t have to.
In the next few years, if we see a US dollar collapse, being short equities and long gold at the right time will make you a fortune while most uninformed investors will feel the pain.
Stay on the right side of the market, trade with the TRADEPROs!
If you want to join us in our live trading room, check out the Day Trader package here >
If you prefer to trade more passively, checkout our newsletter, trade ideas and live analysis in the Swing Trader package here >
Good luck and good trading.
The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.