Assessing Inflation And US Dollar From Cycle Analysis

February 26, 2017

Global Currency Inflation

All major developed countries are engaging in printing their paper currencies to pop up their economies.  In this article, we study the question:

With rising inflation, what will happen to the global currencies and gold?

As recently pointed out by former Federal Reserve chair Greenspan and others, gold will become a global currency.  This is to prevent the madness of debt creation and competitive currency debasement.  Meanwhile under a rising sea of currencies, inflation goes up.  The paper currencies, gold price and other investment class will be highly impacted.

Measures Of US Inflation

We used three metrics to study the issue of rising inflation: 

  • Change in annual CPI rates
  • Ratio of long bond to immediate bond yields
  • 10-year bond yields

The reader is encouraged to visit John William’s  Shadow Statistics website for perhaps sophisticated inflation measures and his insightful commentary.

Annual Inflation Rates

Our cycle analysis indicated a rapid rise of inflation rate till the middle of 2019.  The data are rugged but the increase in forecast is clear.

Ratio of Bond Yields

This is our favorite measure of inflation.  Our analysis showed a rise in the ratio soon, with a temporarily top in September this year.  This is consistent with the inflation rate from CPI measure.

10-Year Bond Yields

Our analysis of de-trended bond yield also indicated a rise in trend.  This is not a good sign for bonds.

US Dollar Heading Down

While there are good debates to the direction of US dollar, we believe from our independent cycle analysis and correlation study that US dollar is heading down.  Trump’s policies will likely add to the downward pressure.

US Dollar 8-Year Cycles

Our cycle analysis of US dollar indicated a downward movement with a pronounced 8-year cycle.  We have included an analysis of Japanese Yen, which Trump claimed during his campaign is undervalued.  Note the upward movement in Yen and the 8-year cycle.

US Dollar And Correlation With Inflation

We use the ratio of bond yields (^TYX:^TNX) as our inflation measure.  The following chart showed the correlation of US dollar with inflation.  These two are highly anti-correlated.  When US dollar drops, inflation rate rises. 

Impact Of Rising Inflation

The impact of increasing inflation on gold and other currencies is given in this section.

On GOLD – Highly Correlated

On Japanese YEN – Highly Correlated

On EURO  – Highly Correlated

On DOW Index – Highly Anti-Correlated

Summary

The correlation coefficients in the above analysis are summarized in the table:

The competitive currency debasement will likely lead to the rise of gold price and gold as a viable currency standard to hold central bankers responsible for the monetary action. While the policies of new Trump administration are still uncertain, we are encouraged with the recent quote by Vice President Pence at CPAC.

“If his people, who are called by his name, will humble themselves and pray — [God will] hear them from heaven and he’ll heal this land.”

F.T. Dao is a private investor and recently left the corporate world for technical analysis of stock markets.  He holds a PhD degree in physics and has done technical analysis of the market on the side for many years.  He welcomes constructive discussion and can be reached at:  ftdao245@gmail.com  , ftdao245@comcast.net

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