This page has been archived and commenting is disabled.
Is The Dollar About To Lose Grip On Commodities And Gold?
The story in the markets since last year has undoubtedly been the crash of the oil price (-50% in six months) and the monstrous rally of the U.S. dollar (+25% in the same period of time). Most other market trends have been side-effects of this, or have simply been negligible.
Putting the recent U.S. dollar uptrend in perspective provides some interesting insights. During the second half of the 90ies there was a similar rally in the dollar which pushed commodities and significantly lower; that appeared to be of relatively short duration, however, even in the wake of a continuation of the dollar rally.
The very long term U.S. dollar chart provides three interesting insights from a chart point of view.
- First, the steepness of the recent rise is quite unusual. There have been no other instances in the last 30 years where the dollar has risen more than 25% in 9 months, like it did recently.
- Second, the dollar is currently severely overbought, as measured by the RSI momentum indicator. In fact, it has not been in such an overbought condition in the last 3 decades. As readers can see on the upper panel of the chart, the dollar is as overbought as it has been in three decades.Since then, it has only exceeded a handful of times the critical 70 reading, but did not stay there for a meaningful period of time.
- Third, and foremost, the dollar is entering an area which should provide strong resistance. That area is indicated with the red rectangle on the chart. It is no coincidence that this resistance area is close the 100 level; we know that round numbers can act as powerful resistance or support areas. Several attempts since 1987 to break through that magical 100 area have been unsuccessful which make its importance even higher.
Obviously there is no guarantee that the dollar will not break through 100, nor is the above chart telling us anything about the further upward power. It tells us that an intermediate term correction should be near, and that the recent rally has been exceptional, diminishing the probability that it will continue at the same pace longer term.
The rally of the greenback has put a lot of pressure on commodities, crude oil being the major victim. The million dollar question is how much more downside there is given a continuation of the upward trajectory of the dollar.
We prefer to let the charts answer this question. The below chart shows the CCI, a proxy for the commodities complex, since 1994. The price pattern is very clear: there is a huge support zone slightly below today's price. The chart also shows that commodities are as oversold as they have been today since 1999. While momentum is not a relevant timing indicator, we can conclude that the downside power appears to be relatively limited. The most likely scenario is that 2008/2009 support zone will produce a meaningful bounce, at least on the short and intermediate term timeframe. Mind how that happens to coincide with the resistance area on the dollar chart.
The grip of the dollar has been outspoken in almost all commodities, but not in precious metals. Although commodities have experienced a meaningful decline since last year, it has not been reflected in the price of gold. The yellow metal has held up rather well. That is remarkable because gold recently tested multiyear support, and it has done so successfully thus far.
The next chart shows that gold has additional downside potential within its uptrend channel. Based on the trendline that started in 2001, we could make the case that gold could fall to $1050 and still remain within its secular uptrend. Mind how that trendline happens to coincide with a structural support area on the chart which goes back to the 2008 highs, adding to its importance. Old resistance should act as support going forward.
But the most interesting insight, in our view, comes from a similar period of exceptional strength in the U.S. dollar. During the 1997 – 2000 timeframe, the dollar index went up from 85 to 119, as expressed by the green dotted line on the next chart. Mind the blue rectangle which displays a very strong trending move, starting in November 1996 and producing an intermediate peak in the summer of 1997. That was followed by a consolidation period of more than 2 years and a continued upleg into 2000.
The previous chart also discloses the dynamics between the U.S. dollar, U.S. stocks (light red line) and gold (yellow line). The key take-away here is that the dollar was able to push commodities and gold meaningfully lower during its first trending move in 1997. However, during its consolidation period and its second upleg, there was no similar pressure on gold anymore while commodities rallied along with the dollar. The stock market kept on trending higher, and corrected only slightly in 1998 (Russia crisis).
If history can serve as a guide, we should expect a decreasing grip of the dollar on commodities complex and gold. The first leg of the dollar's rally is able to produce a meaningful impact on commodities and gold, but that power fades during the consolidation phase and the second upleg. We have looked at the last chart with the inclusion of the 10 year yield, looking for a correlation between both assets, but were not able to come to any meaningful conclusion.
Fast forward to today, gold and commodities are running into a very strong, multiyear support area while that happens to coincide with the dollar running into strong, multiyear resistance during its first upleg.
Does it mean that gold and commodities cannot go lower? No, that is not the right conclusion in our view. The dollar can surely go higher, but it will take a rest (consolidation) in the foreseeable future. Likewise, gold and commodities are near structural support, implying that the downside is limited. We believe there is also no conclusion about the potential upside in gold and commodities; we only know that their consolidation process could take a while to complete.
Going forward, all this will result in opportunities for investors. Our belief is that a select number of resource companies are about to outperform their peers. It requires a lot of study to uncover the stars in this market, but the rewards of those select companies could be astonishing on the long run.
>>> Check Out Our Latest Gold Report!
Sprout Money offers a fresh look at investing. We analyze long lasting cycles, coupled with a collection of strategic investments and concrete tips for different types of assets. The methods and strategies from Sprout Money are transformed into the Gold & Silver Report and the Commodity Report.
Follow us on Twitter @SproutMoney
»
- advertisements -
Charts and charting are merely mental masturbation.
Sound and fury, signifiying nothing.
They should have used tens for the picture.
dupe
Tightening it up a bit: The commodities are priced based on printed paper that people accept as having value.
And what are those commodities priced in? Oh yea, dollars.
SIMPLE ECONOMICS
4.5 TRILLION MORE OF ANYTHING = LESS VALUE
...oh wait
I just realized, there is "Sprout Money" and "Sprott Money"....how many of these things are gonna sprout up?
The only reason gold is not up here is because of the USD strength. Against all other currencies gold is up.
Dollar Strength = It's value reference (Euro, yen, etc) of crap
I believe all markets are rigged via collusion of CBs and BBs.
If that's true,
charts are as worthless as teats on a boar hog.
Yes and no... it still is a market - rigged and manipulated as it is - but the laws of demand and supply still apply. in terms of any paper instruments (futures, options, CONeX contracts etc) they can supply any (almost infinite) amounts... more than any other regular entity and thus can harvest their stops up or down... and they do, esp. in PMs, all the time. However, they cannot print fizz, and that is where the rubber will meet the road. Once they push price too low, at some point they start running short of the actual metal... miners already hurt, and the western vaults seem to be running low... ETFs (GLD) has already been plundered pretty good... The lower gold goes the better it looks to me, as it signals the end is nearer and nearer.
You mean the beleaguered Gold miners might actually get a bid and come out of the dumpster!?!?
Too late for most of my holdings; talk about bad bets! At least it didn't go into Apple.
so what is the alternative, buy Roubles, RMB, JPY, EUR, GBP.... don't think so. US deficit is under control while almost all other countries are running uncontrollable deficits for one reason or another... US economy not doing all that bad with unemployment below 5.5%
If you want to trade paper for paper, I've got some empty ice cream containers I've rinsed out pretty well.
troll bait
5.5%, yeah ok, that's a number you can take to the bank. Well, ok, maybe not to a bank....
Wow! You are really drinking the goverment koolaid! Unemployment is below 5.5% because the government convienently doesn't count the people who can't find a job and have stopped looking. Look at the U6 number. That will give you a more realistic number, around 13%. Deficits under control? Why has the debt grown to $18 Trillion +? If the economy is in such great shape, why are interest rates still close to zero? Get your head out of the sand and stop gulping the MSM bullshit! Oh, and buy gold! That solves your fiat quandry.
23% and $5tn a year is manageable ?
Only with woar.
"There have been no other instances in the last 30 years where the dollar has risen more than 25% in 9 months"
That's nothing, there has never been any other instance in the history of the universe that central banks have completely obliterated any and all forms of price discovery in all financial markets that exist on the planet.
Anything is possible in the aftermath of that...
What was it that brought down the Babylonians again??
The assertion of one simple truth, that there simply is no economic, monetary, fiscal, or political solution to resource scarcity...
Of course those folks did not have the kind of digital distractions and bread and circuses we have now...
Would appear many dollars are and indeed have.
That should make gold and silver terrific here.
We'll see how the bankruptcies and restructurings "pan out."
Nope.
Gold? Please. Here's whats going to happen with gold - first nothing, because its manipulated. Then the dollar will crash and gold will be made illegal and confiscated.
Nope. Illegal and confiscated here maybe, but I doubt that, too. Rather the government trick here might be to tax you on the sale (taking away the very thing you tried to protect: your real wealth). But gold will not be confiscated everywhere else in the world. Store it in a foreign vault. Stop thinking dollars. Dollars are paper. Real money represents only one thing: man hours of labor. Period. That is an accepted fact. When you accept a paper dollar as having represented such, you are saying that you accept its value. Just remember what it really is: a piece of paper. Right now it looks like the rest of the world is about to get rid of the paper you think is more valuable than gold, as they are climbing on the eastern bank bandwagon. After that is complete, good luck with the almighty, worth more than gold, get down on your knees and kiss it and worship it unbacked by anything tangible US dollar.
"tax you on the sale" -- If ever you want to make something insanely popular or drive something underground, make it "illegal" or "tax the shit out of it"...
Dumb Shits like you trust in the all powerful almighty guberment. I have a roill like that in my bathroom and will not accept your green back fiat because its value is zero. The government can't confiscate ass once it hits the fan .
You are living in February of 1933...way back when gold=money. The government would more easily confiscate children than they could gold. Gold can be smuggled to where it is best treated....children have to be shipped in 20' containers.
Well, gold still equals money. But this strikes me as funny: for all the people that poo-poo gold, and say it's worthless. Why is the government so happy to get their hands on it and control it? Why did they make it illegal to own, and why did they confiscate it at one time? Because it has no value? Bretton Woods set the price of gold at $35.00 an ounce. If you held onto $35.00 in paper cash when Bretton Woods was abandoned, or an ounce of gold, which did the job better for you now that all that time has passed?
" Back then, people trusted the government. They trusted FDR. There was a general sense that they would do the right thing to help the American people.
Today, in the event of a dollar collapse, it is feasible that the authorities may decide to confiscate private gold holdings again. It is hard to imagine that the American people will go along with it. "
- Jim Rickards, Currency Wars
(paraphrased from memory, not exact quotation)
What gold holdings? Governments never have success with "laws" that cannot be enforced.
Don't say I didn't warn you.
Do you know what happens when the feds try confiscating gold and individual states, like Ut, Az, Ok and Tx, have laws that declare gold and silver legal tender? People give a gigantic middle finger to the feds and live their lives using the gold they have.
Yes, we should all be grateful for the sheep overlords...
Knowing gold bugs, if a government agent comes looking for gold he'll return with lead.
Sprout Money or Sprott Money? :)
Gold ain't doing shit, crazy Martin Armstrong agrees.
blah blah blah technical analysis...charts don't mean shit, especially in a completely manipulated "market".
But manipulated only as long as it can be manipulated.