Market Slice: Dollar Daze

Dollar Daze, Hands holding one hundred dollar bills cash to show lots of money

 

What to expect in this week’s Market Slice:

  • What exactly is going on with metals in trading and how this is impacting the price of gold and silver
  • How this fluctuation is impacting foreign currencies and trading portfolios
  • Details on the “Yen Crisis” and the price of Gold in Japanese Yen and Euros

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The Strong Dollar is Wreaking Havoc in the Metals Markets

Gold and silver traders have been perplexed over the past several months by the continued decline in metals prices, even as signs of recession are on the increase.

Conventional wisdom says that rising interest rates mean a weakening economy and declining prices in stocks, which should be good for gold. On the other hand, higher interest rates mean better yields on Treasuries, which can be seen as an asset class competing with gold for investment capital seeking safety.

Of course, locking in a yield at today’s rate might look good compared to the near-zero rates of recent years…but if inflation continues and rates go higher, those bonds lose value. This, again, points in the direction of opportunities in gold.

But the precious metals are totally out of favor at present, and prices – at least in dollar terms – are declining. Gold closed below $1665 on Tuesday, continuing the recent decline.

Courtesy of barchart.com

This 1-year chart shows a wide channel of lower highs and lower lows off the March ’22 high of around $2050. With Gold in a six month decline it would be reasonable to ask if this represents a new bear market for the glittering metal…or is it just a correction in the long-term uptrend?

Let’s look at the 20-year chart:

Courtesy of barchart.com
 

Note the gray boxes. On the left, we have the double top of 2011-2012, which preceded a nearly 40% decline over the next three years. On the right, we see the current double top, made in August ’20 and March of ’22.

While it’s too soon to say that we are heading into a similar decline to what occurred in 20212-’15, the similarities are a bit unnerving for Gold bulls. We might also add that RSI (the second section on the chart) shows that Gold is by no means oversold at this point. 

The Directional Index (ADX), on the other hand, is nowhere near as elevated as it was in 2011. This might indicate that an extended deep downturn is less likely.

Nonetheless, from a technical standpoint Gold could have a way to go before establishing a bottom on the long-term chart. However, the 1-year chart above does show Gold in oversold territory. Short-term traders might look for a bounce, but the overall outlook is not bright.

Fundamentally, on the other hand, the Gold picture is significantly better. The mitigating factor acting as a brake on Gold prices is the persistent expectation in the market that the Fed will be able to engineer a soft (or at least not crash) landing with its continuing rate hikes. 

So far, the market retreat has been mostly orderly, fulfilling one of Fed Chair Powell’s primary objectives for this cycle. If the air continues to slowly leak from the equities asset bubble, the likelihood of a panic rush for the safety of gold is less…which could bode ill for a trend reversal. On the other hand, we’ve written frequently about the many hidden dangers that could tip this fragile market into a full-fledged rout. Another “black swan” event could easily be a catalyst for a swift reversal of fortunes in the metals.

There’s one other factor to consider when evaluating the prospects for the precious metals, and that’s the strength of the Dollar. With the U.S. Dollar Index approaching 20-year highs, it’s important to consider the impact the strong dollar has on various commodity prices.

We know that everything priced in dollars on the world market is more expensive in local currency. So what does this mean for Gold? The charts below show the price of Gold in Japanese Yen and Euros. With the Yen in crisis, it’s not surprising to see that the price of Gold has held up much better there.

The Euro, too — which has been battered, although not nearly as much as the Yen — shows
relative strength in Gold.

The question then becomes: how much of Gold’s decline in dollar terms is due to the strength of the global reserve currency, as opposed to any structural weakness in the Gold market? Some Gold bulls are just waiting for the opportunity to pounce, feeling that the bottom is close. Here’s a take from Gold permabull Sprott Money that could be encouraging to those who are waiting to see a turnaround in Gold.

 

What About Silver?

Silver is tricky. The market is much thinner than Gold, and is notoriously manipulated (see here, here, and here, for starters.) However, Silver prices do tend to track with Gold, for obvious reasons. Here’s the 1-year Silver chart:

While Silver’s recent selloff hasn’t been as steep as Gold, the price is still drifting lower, in keeping with the same months-long trend we examined above. Clearly the strong Dollar is having its effect in this market, as well.

Investors concerned about the health of the U.S. economy, the dangers in a world on the brink, and the prospects for a real financial criss continue to look for opportunities to establish long-term positions in precious metals. Some are looking at gold and silver mining stocks, where prices have been weak due not only to metals price declines, but also the overall weakness of the stock market. Others look toward physical metals, to avoid the manipulations of the paper markets.

Traders, on the other hand, work in shorter timeframes, and run the risk of getting burned when they attempt to time an expected turn in metals prices.

For now, we do not see asymmetrical opportunities for trading metals; therefore, we can only suggest, with our friends at Sprott, that you probably don’t want to try to catch a falling knife. If you’re bullish on the prospects for a turnaround in Silver and Gold prices, wait and watch until a reversal is clear. Then there will probably be an extended run, with a solid chance to book substantial gains.

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