THE DOLLAR IS GETTING FLUSHED DOWN THE TOILET

The topic of the week in the precious metals market: "What's driving gold and silver prices higher and higher? Should I sell and take profits?"

Today's chart is the driving force behind the hot topic. It's the past 12 months of trading in the U.S. dollar.

Last week, Ben Bernanke told America he's ready to do anything in his power to keep the U.S. economy inching along. This means he'll do anything to support asset prices like stocks and housing… even print up fresh money.

The market is reacting to Ben's idea by flushing the dollar. As you can see from today's chart, the dollar has been clobbered to its lowest low in more than seven months. Real "hard money" assets like gold and silver are soaring to their highest levels in decades as a result.

That covers the first part of our topic. And the second? Sure… gold and silver are overbought in the short term. They're due for a "relief" correction. But our view is, take a page from China's playbook and use any weakness in the precious metals to buy more.

Jim Rogers: Inflation risks are "extremely serious"

Investor Jim Rogers, chairman of Rogers Holdings, said the threat of inflation is “extremely serious” and the world is in an ongoing bear market for financial assets.

Rogers, who predicted the start of the global commodities rally in 1999, is betting on a decline in stocks and gains in commodities, he said today in an interview with Bloomberg-UTV in Mumbai. He’s also bought up the euro and the U.S. dollar and said agricultural commodities are “extremely cheap” on an historical basis.

The Federal Reserve this week said Europe’s debt crisis may hinder growth in the U.S., the world’s largest economy. Global stock markets have plunged amid the fallout from the European crisis, which saw euro nations and the International Monetary Fund back up Greece with an almost $1 trillion bailout.

“The world has an ongoing economic problem which has not yet been resolved yet,” Rogers said today. “I don’t think the best place for people to invest is in stocks.”

Asian stocks dropped the most in nearly three weeks today on disappointing sales and earnings forecasts by U.S. companies. The MSCI World Index of the largest companies has lost about 13 percent of its value from a more than two-year high in April.

“I am still concerned about debt around the world,” Rogers said. “I am not terribly optimistic about the world economy partially, largely, because of the gigantic debts which have built up.”

Rogers said he’s not optimistic about the euro or the U.S. dollar in the “long term.” Sugar and silver are cheap on an historical basis, Rogers said.

Why a Rising Dollar Is Horrible News for China

Hugh Hendry is the famous British hedge-fund manager who predicted the banking crisis and made 40% in 2008. Every few months, Hendry writes a letter to his investors, called the Eclectica Monthly Letter. It's among the best financial commentary you'll find anywhere on the Internet.

In his most recent commentary, Hendry implies you better watch this chart…

It shows the U.S. dollar index over the last 20 years. The U.S. dollar index measures the dollar's value against a basket of international currencies. First, notice the decade-long bear market ending in 2008. The dollar lost 41% of its value against foreign currencies in this time. Now, look at the recent price action. The dollar tested its low in 2009. Now, it's rising…

Here's the thing that makes this chart so important…

Hendry says if the dollar continues rising, you're eventually going to see a depression in China and possibly the rest of Asia. Commodities will also collapse… especially the commodities China buys in big volume, like cement, steel, aluminum, copper, and iron ore.

It's because of exchange rates. You see, China has pegged its currency to the dollar. When the dollar rises, the Chinese renminbi also rises, relative to all the other currencies in the world except the dollar.

When a country has a high currency exchange rate, its citizens have high purchasing power in the rest of the world. They have a large choice of cheap foreign investments and they feel rich when they travel. Working class Brits buying beachfront condos in Spain and Japanese investors buying Pebble Beach golf course property are good examples.

You'd think a country would be happy to have a strong exchange rate, so why is a rising dollar so bad for China?

China used its pegged exchange rate to destroy the trading competition and grow its economy at 9% a year for the last 15 years. Hong Kong, Korea, Singapore, and Taiwan only managed 7%-8% growth over the same period.

A 1% difference may not sound like much, but China basically used this edge to overtake Germany as the world's largest exporter in 2009 and build the largest lowest-cost manufacturing "sector" the world has ever seen.

In other words, China fell for the classic trap. It built its future prosperity on the idea the dollar would always be cheap against other foreign currencies.

Already, the Chinese renminbi has risen 16% against the euro over the last 120 days… This is the fastest, most violent move in the history of euro-renminbi markets. The Chinese renminbi has also risen 13% against the British pound, 13% against the Aussie dollar, and 5% against the Japanese yen.

Europe is China's largest trading partner, and Chinese goods have just gotten 16% more expensive for Europeans.

If you're a Chinese businessman and you're using a 2% profit margin to beat the competition and sell your goods to France, it only takes a 2% currency appreciation to put you out of business. As China's vice commerce minister put it recently, "Water doesn't boil if it's heated to 99 degrees Celsius. But it will boil if it's heated by one more degree."

In sum, if the dollar index breaks out to new highs, half the factories in China – and in all of Asia – are in danger of going out of business.

I'll be watching the price level of 89 in the chart above. If the dollar index breaks through 89, it'll be trading at a new six-year high. In my mind, that pretty much seals China's fate. It's at about 87 right now.

If you'd like to bet against Chinese stocks, the easiest way to short China is to simply buy the inverse China fund FXP. It rises 2% for every 1% the FTSE/Xinhua China 25 Index falls.

But the safest way to bet on chaos in Asia and a massive dollar rally is to hold cash in U.S. dollars. You'll get rich as the purchasing power of your cash increases.

You will be financially destroyed if you ignore this trend

For more than 60 years, the U.S. dollar has unquestionably been the world's safest, most liquid form of money – its reserve currency. During times of economic trouble, investors rush to buy U.S. bonds as a safe haven, causing their value to rise sharply.

And that's what happened – briefly – during the Greek crisis last month. But then, something changed. As soon as the ECB announced its big bailout and established a swap line with the U.S. Treasury, investors realized there's no real difference between the U.S. dollar and the euro. They're simply different names for the same thing: paper money. And investors understand the value of paper money may finally collapse under the weight of these massive sovereign debts.

What did investors buy when they sold the U.S. dollar in this crisis? Where did they run? As you can see, they bought gold… and to an increasing degree, silver. We believe this preference for metallic money will continue to strengthen as the financial problems of the U.S. Treasury begin to mount.

If you ignore this trend, you will be financially destroyed over the next several years. If you act now to protect yourself and your family, it will be the greatest single investment decision of your life.

The U.S. dollar is about to implode

The world has officially entered what we believe will be the final chapter of the U.S. dollar's reign as the world's reserve currency. The dollars in your wallet now not only back bankrupt U.S. money center banks and subprime home "owners"... they are also officially backing all of the economies of Europe. The world's monetary system has evolved into a new kind of global socialism. We don't think that can be bullish for long.

Here are the facts we've been told so far... The European Central Bank (the ECB) will spend $1 trillion (750 billion euro) bailing out Europe's sovereign borrowers (like Greece, Spain, and Portugal). It will also purchase billions of troubled assets from Europe's largest banks – like UniCredit. The mechanisms for these purchases will likely be convoluted. The EU treaties contain a no-bailout clause, forbidding any member to "be liable for or assume the commitments of" another EU country. And the European Central Bank cannot lend to countries or buy their debt directly. To get around the technicalities, the EU created an off-balance-sheet entity that will "borrow" the money and lend it to countries in trouble. Whether this matters to the EU's creditors or not, we can't say... but we certainly wouldn't lend to an off-balance-sheet entity of a central bank that's not represente d by any country. Buying euros used to be a game of "who owes me nothing." Now, it will be a game of "whose off-sheet entity owes me nothing." We doubt that will make Europe more creditworthy in the long term.

What does any of this have to do with the U.S. dollar? More than you'll ever hear anywhere else. On paper, the money is supposed to come from Europe's biggest governments and the IMF. But in reality, most of the money will be borrowed from the U.S. Federal Reserve, which just happened to re-open its trillion-dollar swap account with the ECB this weekend. Ironically, the Federal Reserve says these loans are risk-free because the counterparty is a central bank (or at least the off-balance-sheet entity of a central bank). But if the ECB is truly creditworthy, why couldn't Greece, Spain, Portugal, Italy, or Ireland raise the money for themselves?

At the beginning of the year, we declared rising interest rates in the U.S. as "the single most important trend in finance." We believe interest rates on long-term U.S. government bonds will rise to compensate investors for the increased risk of owning paper-backed sovereign debt. Our logic is simple: The more money the U.S. prints to bail out banks and other sovereign borrowers, the riskier the U.S. balance sheet becomes. By the first half of 2010, the Fed had already spent $2 trillion to bail out Wall Street's banks and the U.S. mortgage market. And as we reminded subscribers just last Friday, because the world's banking system uses the U.S. dollar as its reserve currency, the Fed would eventually be forced to bail out Europe's economy. Indeed, that's exactly what happened over the weekend. The U.S. Federal Reserve has officially become the world's lender of last resort. We would humbly suggest these policies will likely lead to a permanent loss of value for holders of U.S. dollars.

Why are we so concerned? Printing money to bail out borrowers around the world will not solve the problems of overleveraged governments or debt-ridden economies. It simply shifts the risks from private balance sheets to the U.S. government's. The U.S. dollar has assumed all of these risks. Our currency has become a ticking time bomb.

You can watch the dollar die, one day at a time, by keeping your eye on the growing spread between the value of long-term U.S. bonds and the price of gold. Over the last year – even as the U.S. economy apparently improved – the spread widened by about 35%.

The NEW Greatest Trade Ever

Last weekend, my friend Porter Stansberry gave one of the most powerful speeches of his career (we've been working together for about 14 years, so I've seen a lot of them).

We were at the open-air Blue Iguana restaurant on Ambergris Caye in Belize. And Porter told the small crowd the story of the NEW Greatest Trade Ever...

After that speech, the attendees who weren't compelled to act on his idea are either incredibly foolish ("that's too crazy") or incredibly lazy ("ah, we've got time before all that comes to pass").

You might know the story of the old "Greatest Trade Ever." In short, in 2007, hedge-fund manager John Paulson made $15 BILLION for investors in his fund by betting against the housing market. (If you don't know the story, pick up the book The Greatest Trade Ever by Gregory Zuckerman.)

Betting against housing seems obvious in hindsight... But when Paulson put the trade on, he was essentially alone – everyone thought the government would somehow manage to keep the charade going.

Porter's speech in Belize was as compelling as Paulson's ideas were two years ago. Like Paulson's, Porter's trade is obvious, but everyone expects the government will smooth it over. Like Paulson's, Porter's trade may reach a point where the government simply can't fix it – and get there sooner than anyone expects.

Porter's idea is really big... He believes the entire paper money system is about to fail – very soon.

"If aliens landed tomorrow, they wouldn't understand our money system at all," he explained. "The aliens would ask, 'People really save these pieces of paper backed by nothing, issued without restraint, by a government that certainly can't pay its debts? That makes no sense!'"

As Porter sees it, "The United States is the only government in the world that can actually afford to underwrite the world's banking system. That's not because we have any real savings, it's only because we control the world's reserve currency. It's a paper standard, which means we can always print more of it."

Of course, that has been the case for years now. It's worked in the past. But Porter laid out the coming collapse of that system... and what's bringing it to a head right now:

"The annual funding costs of our national debt are now approaching $4 trillion per year between deficits and rolling over short-term debts. There is no entity large enough... not even China... that can come close to lending us the $4 trillion we need in the next 12 months. Add every possible source up, and you're still short by $2 trillion."

It was a dire speech. The most compelling part was the obvious inevitability of it all. The only question is the timing – when does the U.S. dollar house of cards fall?

Betting on the collapse of the paper money system will be the Greatest Trade Ever... some day. Porter predicts it will be way sooner than anyone thinks.

What does Porter recommend to play the new Greatest Trade Ever? One thing: Gold.

No point getting craftier than that. Governments can print money, but they can't print gold. Porter prefers to own it... Have it in your possession, not in a paper form in an account somewhere.

While the "end of paper money" is an outlandish prediction, Porter has a history of "outlandish" predictions that have come true...

Years ago, he predicted the end of General Motors. Many readers got angry and thought it was impossible. GM was an American icon. But Porter got it right, and GM shareholders were wiped out.

In November 2007, his single best idea at our annual investor conference was the demise of Fannie Mae and Freddie Mac. Back then, they were two of the largest companies in America. It was a shocking prediction. Within a year, they were bust.

Today, Porter's big prediction is his most outlandish ever. We're not talking about iconic American companies. We're talking the end of the world money system. But Porter's track record is excellent. And the outcome is inevitable, as he showed.

Porter is buying gold. And so is the guy who made the Greatest Trade Ever, John Paulson. Paulson recently took a multi-BILLION dollar position in gold and launched a gold fund.

In 2007, Paulson saw an inevitable crash in housing and made the Greatest Trade Ever.

In 2010, Paulson and Stansberry are betting against the dollar – they're buying gold. How about you? 

The dollar could be breaking out

After trading sideways for much of the last two months, the US Dollar index successfully tested its 50-day moving average last week and looks to be in the early stages of a new leg higher.

The best currency trade in the world right now...

Two months ago, I recommended betting against the euro...

It was my top idea. The entire issue of my True Wealth newsletter two months ago was dedicated to that idea. And in last month's issue of True Wealth, I said it was my "top recommendation."

Here's exactly what I wrote two months ago:

This type of opportunity doesn't come along very often. It is time to bet against the euro. It is overpriced. The euro is in a horrible situation right now. A mountain of factors is against it. And in just the last three weeks or so, a downtrend has been established – so it's time to make the trade.

My friend, the euro is crashing...

Dollar soars overnight on surprise rate increase by Federal Reserve

The Fed has been talking about its "exit strategy" for quite some time. Few believed he would pull the trigger on anything soon. Yet, Bernanke, unexpectedly raised the discount rate headed into options expiration.

Dollar rallies strongly today

We want to draw your attention to today's dollar rally.

The dollar fell hard yesterday as stocks rallied, but it quickly regained those losses today and looks to be headed to new highs.

Strength in the dollar has preceeded losses in stocks so far this year, so traders should be prepared for the possibility of more market weakness in coming days.

Dr. Doom Roubini: Dollar rally ending

The dollar’s recent rally, which has taken it to a six-month high, will soon fade against Asian and commodity currencies, says star economist Nouriel Roubini.

Commodity currencies include the Brazilian real, Canadian dollar and Australian dollar.
He anticipates a 15 percent to 20 percent drop by the greenback against these currencies in the next two to three years.

Morgan Stanley: This trade could be hugely profitable this year

Morgan Stanley analyst Sophia Drossos says shorting the euro and going long on the dollar is likely to make money across a wide range of economic scenarios in 2010.

Long U.S. dollar "is a trade that can work in environments of risk aversion as well as stronger global growth,” Drossos notes.

“Because we believe a revival in the global economy will be led by U.S. growth outperformance against G4 economies.

It's Time to Bet Against the Euro

It's time to bet against the euro...

That's the trade I recommended over a month ago in my True Wealth newsletter. And the trade is still as good... no, better... than it was when I first recommended it.

Here's why I recommended it in the first place... and why NOW is an even better time to make the trade than when I told my paid subscribers about it in mid-December...

First, as I'm sure you've already heard, Greece is at risk of falling out of the euro. But we have many other factors telling us the euro will continue to go down...

First off, we have the trend... In currencies in particular, once a trend gets going, it's hard to derail it.

Last year's trend was a crashing dollar. In 2010, it looks like the trend will be a crashing euro. No matter how you analyze trends, you'd have to say the euro is finally in a downtrend right now... It peaked in late November and is down more than 8% already. That's a huge move for such a short time in a major currency.

When I first recommended betting against the euro in mid-December, I wasn't certain we were in a downtrend yet. Now, it's absolutely clear... the euro fell into the $1.30s yesterday for the first time since last summer.

Also, importantly, the euro is WAY overvalued relative to the dollar.

One of my favorite simple indicators of whether a currency is overpriced or underpriced is the "Big Mac Index" from The Economist magazine... As the chart here shows, whenever a Big Mac in Europe is 50% more expensive than a Big Mac in the States, the euro crashes.

We're not at the 50% overvalued point anymore (which is a real extreme). But the euro is still very expensive... A Big Mac in euros is around 35% more expensive than a U.S. Big Mac.

We will also likely have interest rates in favor of the dollar in 2010...

If the European Union must save Greece and the other "PIGS" (Portugal, Italy, Greece, and Spain), then interest rates in Europe will stay low. But the U.S. is in recovery, where rates can rise. At the very least, Europe won't have any interest-rate advantage.

Other factors in the dollar's favor include a potential reversal of the Big Trade of 2009. In 2009, as risk abated, everything went up and the dollar went down. Now, risk is making a bit of a comeback – the dollar (the safe haven) could go up. Another factor is, with the troubles in Europe, the euro has little chance of competing with the dollar as the world's reserve currency.

I could go on... But in short, this type of opportunity doesn't come along often.

The euro is in a horrible situation right now. A mountain of factors is against it. It is overpriced. And in the last two months, a firm downtrend has been established. It is time to bet against the euro.

Morgan Stanley: Dollar set to soar

Morgan Stanley currency analyst Sophia Drossos says the dollar is very undervalued and will rise significantly.

“We forecast the USD to rally 10 percent against other developed market currencies in 2010, with most of these gains concentrated against other G4 currencies,” Drossos writes in a note to investors.

“For the dollar to remain weak, U.S. data would need to continue to disappoint versus other major economies,” she notes.

“However, we do not expect this will be the case.