The U.S. Dollar Index (USD) peaked last week.
I can’t say for sure yet if it’s an important, long-term peak – and the start of a dollar bear market – or just a modest, intermediate-term correction that eventually bottoms and propels the buck to higher levels.
The only thing I can say today, with a modest amount of confidence, is that the dollar is headed lower over the next few weeks.
Now… I know I was early in calling for an end to the dollar rally last month. The U.S. Dollar Index was trading just above 93. It had rallied nearly 5% since I turned bullish on the buck in early April. Technical conditions were extended to the upside. So, that seemed to me to be a reasonable place at which to take profits on any pro-dollar trades.
But the buck kept going. USD traded as high as 94.70 last week before ending the week at $94.18.
That peak at 94.70, though, triggered a few alarm bells. And that has me thinking the buck is in for a rough summer. Take a look at this chart of the U.S. Dollar Index…
USD formed what appears to be a “double top” last week as it approached the 94.70 level. Notice, though, that as USD was challenging its May high, the various technical indicators at the bottom of the chart were forming lower highs.
This “negative divergence” is often an early warning sign of a trend reversal from bullish to bearish.
Also… and I don’t say this to be critical, or mean, or derogatory. It’s simply an observation… When I first turned bullish on the buck, way back in April, nearly all of the financial media talking heads were bearish on the dollar. Last week, just about everyone who spoke about the buck on CNBC, Bloomberg, and Fox Business News touted the bullish case.
So, since the popular business media is on board with a dollar rally… maybe it’s time to be looking for a pullback.
Granted… a decline in the buck right now would certainly be helpful to my seasonal bullish argument for gold and gold stocks. And maybe that’s coloring my view a bit.
But looking only at the technical conditions of the USD chart, it sure looks to me like the buck is headed lower. At a minimum, I expect USD to test support at 93 – which lines up well with the 50-day moving average line. But, I also think the odds are pretty good the dollar gives back all of the gains since late April and test support near 90.50.
That sort of a downside move would provide a big boost to precious metals and other commodities that trade opposite to the dollar.
Best regards and good trading,
Jeff Clark
Reader Mailbag
Today in the mailbag, a number of theories on what’s bringing down gold stocks…
The reason that gold is underperforming may be that the Chinese are selling gold to compensate for their large forex outflow. While the Chinese may want gold for the long term, short-term sales may be necessary at this time, in their view. I enjoy reading your work.
– Larry
Jeff, it doesn’t get better for this hated commodity. Dropped Thursday to Thursday. When it does go up it is because the dollar goes down. The dollar is now tired and worn out. It has been going up for so long because interest rates are going up (guaranteed by Fed).
Dollar index went down Thursday, yet gold didn’t move much! Wow! I was amazed. No one and I mean no one was rushing to buy gold. The dollar is always the “key” for gold. I follow your graphs etc. and they are terrific info. However, the dollar trumps everything when it comes to gold and silver.
Please don’t stop talking about the dollar/gold, and make your gold predictions based on sound, intelligent dollar/gold relationships and predictions. Predict when the dollar will drop, and gold will soon take off higher, no doubt about it. Your graphs help. But only the dollar will move hold and don’t forget that! Dollar is about to drop and gold is about to go up. I think we buy now. Big time!
– Richard
You can’t apply technicals to a manipulated market!
– Phil
And two responses to Friday’s essay, “Why Gold Bugs Are Depressed”…
Jeff is being politically correct and sticking with obvious trend analysis. The real reason gold bugs are depressed is we are tired of the blatant manipulation of both silver and gold by the paper exchanges that is totally ignored by the SEC.
– Bob
Hi Jeff, I really appreciate your morning guidance. Brief and to the point. I am not a true gold bug. I hold a significant amount of physical gold and silver as a hedge against the dollar and the banking system. But the rest of the gold ethos escapes me. Instead, I am a very conservative retiree with a need for income. Gold and gold stocks offer trading opportunities – they are familiar income-generating vehicles.
– Bill
Thank you, as always, for your thoughtful letters and insights. Keep sending your stories, questions, and suggestions right here.