The US Dollar has surged six percent since July. This increase has had a depressing effect on commodities and, despite the strong performance of industrial metals this year, commodity metals are now suffering corrections.
Aggressive European Central Bank action to push up the economy and lower deflation has made the Euro plunge. However, this is not the only currency that is falling against the US Dollar. The Canadian Dollar, Japanese Yen, Swiss Franc and even the British Pound are losing ground. This broad-based drop in currencies could boost the Dollar Index for some time.
In the chart above we can see the US Dollar Index since 2011 (the Index measures the dollar against six foreign currencies). The index is forming a bullish pattern and if it manages to hit new ground it will reach a sx-year high which will be a very bearish development for commodities.
This chart shows the CRB Index of nineteen commodities since 2011. We can see how the index is approaching new lows as the Dollar Index is approaching new highs. Further US Dollar strength would keep putting pressure on commodities and we could see another major downward turn for them.
What does this have to do with the price of the metals you buy?
Regardless of the specific fundamentals of the metals you buy, a metal is more likely to surge in a healthy commodities environment and it will tend to decline when commodities are falling.
The recent drop of commodities can also be seen in metal prices. The metals that we recommended to hedge this year (aluminum, nickel, zinc and palladium) are suffering modest corrections while the weaker metals that we didn’t recommend to buy yet (gold, silver, tin, copper) have significantly fallen.
What This Means For Metal Buyers
Further advance of the US Dollar could impede the strongest metals from increasing, while it will make the weaker metals to continue their way down.
by Raul de Frutos