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.

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