Last week, I talked about volatility and the wild swings the stock market has taken this year.
But other markets - namely currencies and commodities - have had their own shares of ups and downs.
Take the dollar, for instance.
This week, it's on a winning streak. The dollar index gained 2% in the past week, boosted by rising interest rates and higher Treasury yields.
But ultimately, it won't last.
Here's why...
First, it's worth remembering that the dollar fell as far as 5% to start the year. Its recent gains have helped recover some of that ground, but it's still down about 1.25% year-to-date. And that's not to mention the fact that the dollar index actually tumbled 10% in 2017.
Also in 2017, the euro jumped more than 15% against the dollar and the pound sterling gained 10%. And in that time, a lot of currency traders made money by making large, bullish bets on the pound-to-dollar and euro-to-dollar exchange rates, as well as bearish bets against the dollar in general. (This all happened while the Fed was raising rates, too, mind you.)
Anyway, this trade carried a lot of currency speculators through the year. But now, it's reversed, and short-sellers are buying back into dollars to cover their bets. Essentially, it's a "short squeeze." And those typically don't last very long.
Furthermore, there seems to be an overly-optimistic view of U.S. growth. The perception among some - particularly the more hawkish FOMC members - is that GDP growth is about ready to skyrocket, taking interest rates and inflation along for the ride.
But that's a rosy outlook. GDP crept up 2.9% in the fourth quarter of 2017, and today's report showed just 2.3% growth in first three months of 2018. Those aren't impressive figures. They also show nothing to indicate the tax cut Congress passed in December is doing anything to goose growth.
That makes the economy a lot more vulnerable to rising interest rates and a stronger dollar (which hurts trade and increases input costs). And if GDP growth weakens further or stagnates, earnings and stock prices could slump. Just as bad, unemployment (which is at an absurdly-low 4.1%) will edge back up.
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Meanwhile, European economies, where interest rates remain low, will gain a huge boost from their weaker currencies. They'll cheerlead a stronger dollar the whole way, as it breathes more life into their own exports. And then, once their satisfied with growth, they'll rein in their monetary policy, causing their currencies to rebound.
By that point, we'll have come full circle, with currency traders banking big on long bets on the euro and pound and shorting the dollar.
And really, that's the right play, since the U.S. government has abandoned any pretense of fiscal responsibility. The budget and the national debt are going to explode higher, thanks in large part to the massive tax cut that was meant to further goose the economy.
So ignore any short-term spike in the greenback and instead treat every opportunity as another chance to buy gold while prices are low.
That's the contrarian play, the patient play, and the right play. Chasing Fed action is for suckers. The smart money gets ahead of the Fed. And that's what investors ought to be doing now.
Looking down the road, in the next 6-12 months, the dollar and stocks are going to be suddenly sinking downward, and gold will be climbing higher. Anticipate that now.
And, if you really want to leverage gold's action, check out Nick Hodge's latest mining play. He recently uncovered an enormous gold find that could end up being the biggest in American history.
Find out more about that here.
Fight on,
Jason Simpkins
Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of The Wealth Warrior, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page.