The inventor of the "Dollar Smile Theory" believes that the US dollar will plummet to its nadir, and precious metals expert Holt candidly states that gold and silver will be in short supply, with the purchasing power of the US dollar significantly diminishing compared to the past!
Stephen Jen from Eurizon SLJ Capital said in a research report on Tuesday that as inflation continues to subside, the Federal Reserve is likely to ease monetary policy, which could lead to a depreciation of the US dollar by 15% in the next four to six quarters.
In February, inflation, as measured by CPI, cooled down, rising by 6.0% year-on-year, in line with expectations. These figures were released before the Federal Reserve's 25 basis point rate hike in March, amidst the turmoil of the Silicon Valley Bank crisis.
Inflation reached a multi-decade high in June 2022, with an annual rate of 9.1%, the highest level since November 1981. However, Jen expects that this figure will fall below 4% by the fourth quarter of this year. Jen wrote in the report:
"We anticipate that US inflation will continue to decline at a pace roughly equivalent to the rate at which it rose in 2021 and the first half of 2022. Historically, there is scant evidence to suggest that inflation has downward stickiness, although price and wage levels do indeed exhibit downward stickiness."
In Jen's view, who invented the Dollar Smile Theory, the Federal Reserve and the European Central Bank may be close to or have already surpassed peak interest rates, with rate cuts imminent. He added that the Federal Reserve's previous nine rate hikes, coupled with the tightening of credit conditions triggered by the banking crisis, indicate that inflation is trending downward.
Strategists believe that the federal funds rate needs to be lowered by 250 basis points next. After the US Dollar Index rose by 7.9% in 2022, it has fallen by 2.46% in the past four weeks. In Jen's view, the US dollar is "very likely to experience a significant (10-15%) depreciation" over the next 18 months.
Meanwhile, Jen's Dollar Smile Theory posits that the US dollar typically strengthens when the US economy is robust or weak, but depreciates when growth stagnates. He stated:
"The key point to illustrate here, consistent with our 'Dollar Smile' framework, is that slowing inflation and a soft landing should push the US dollar into the nadir of the 'Dollar Smile,' which could mean a 10% depreciation of the US dollar this year, with further depreciation expected next year."
Precious metals expert and financial writer, and precious metals broker at Miles Franklin, Bill Holter, also stated:"We have been very busy since the beginning of the year, but ever since the collapse of Silicon Valley Bank, we have been overwhelmed with activity (referring to gold trading). Interestingly, we are receiving more and more calls, and the investments are also getting larger. We are now receiving millions of dollars in investments every day. This is different from a few years ago, and soon there will be a situation where demand for gold exceeds supply. The supply will be exhausted, and ultimately, the prices of gold and silver may have to 'go to the moon'."
Holt also stated that the purchasing power of the US dollar is declining, explaining:
"Over the past 15 months, the US M2 money supply has contracted by about 5%, marking the first contraction in money supply since the 1930s. However, it is clear that the value of the dollar against gold has decreased, as gold is now over $2,000 per ounce, and inflation is not really slowing down. If the dollar in circulation decreases by 5%, how can inflation not slow down? Prices should have fallen over the past 6 to 12 months, but in fact, this has not happened."
Holt predicts that previous short positions in gold and silver will turn into long positions, further pushing prices higher. Holt said:
"They are like rocket fuel, driving the prices of gold and silver to even higher levels."
What will the US dollar be able to buy in the near future? Holt predicts:
"I believe the purchasing power of the US dollar will plummet by more than 50%, and the world is moving away from the dollar."
- 9 May'24
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