I have been bearish on the dollar for the past couple of years. The main reason for this was the deteriorating fiscal situation here in the U.S. There is a good correlation between the federal deficit and the dollar over the long run. Lately, the fiscal situation has been deteriorating even more rapidly and, as a result, the dollar could easily decline 30-40% as it did during the last major bear market from 2002 to 2011.
You may recall that that bear market for the dollar was also a great time to own precious metals and commodities. The former has already had a terrific run which will likely continue for the next several years. The latter, however, has failed to keep pace – and that’s an understatement. In fact, while gold recently hit a new record high the CRB Index recently fell back to a level it first reached in 1973!
If the dollar is to decline again in a major way as a result of the rapid debt accumulation met with money printing for the explicit purpose of stoking inflation, commodities could prove be the best way to play it. Better yet, considering just how cheap and out of favor commodities-focused equities have now become, they could present investors with a generational opportunity today.
Chart via Goehring & Rozencwajg