Hyperinflation Watch – August 10, 2009

The US dollar is still on the path to hyperinflation. Here are the criteria that I am watching to confirm that the US dollar continues to head for the fiat currency graveyard.

1) Yields on long-term US government paper have been rising ever since the aftermath of the Lehman collapse. As a currency moves toward hyperinflation, yields on the long end of the curve always move higher first because they are more difficult for the central bank to control with its market interventions. Watch the 4%-4.12% area on the 10-year T-note. When yields climb above this resistant point, it will confirm that the US dollar is still on the road to hyperinflation.

2) The stock market is rising even though the economic outlook remains dire. The stock market is a forecasting tool that always looks ahead, and many are saying that the rising market is forecasting better economic conditions. But stock markets also rise during the early stages of hyperinflation as people exit the currency to own shares in companies, i.e., wealth producing franchises that will do well regardless what happens to the currency. Note that commodity stocks have been one of the leading sectors, while financials have lagged, which is what one would expect in a hyperinflationary environment.

3) The US dollar is falling. As the dollar falls into a hyperinflationary ‘black hole’, the gravitational pull will suck in fiat currencies along with it. But for now, the knee-jerk reaction of gathering inflationary clouds is causing people to exit the dollar for other currencies. The demand for dollars is falling: www.kitco.com

4) Lastly and most importantly, precious metal prices are rising. So watch the following points closely for the next confirmation that the dollar is moving toward hyperinflation. The XAU Index closes above 154; silver takes out and hurdles over $15; and finally, gold closes above $1,000. When that happens, we can assume hyperinflation is just months away.