With the U.S. dollar index suffering a “sell the news” event on Dec. 15, the FOMC’s hawkish Summary of Economic Projections wasn’t enough to uplift investors’ optimism. However, while the dollar day traders performed their usual disappearing act, the greenback’s fundamentals were bolstered by the FOMC’s median projection of three rate hikes in 2022.
What’s more, while the USD Index initially dipped below 96 and fell below its rising resistance line (which is now support) on Dec. 16, buyers stepped in, and the USD Index bounced.
For context, a short-term correction is possible. However, the important point is that the USD Index is likely on a medium-term path to ~98. And with gold, silver, and mining stocks often moving inversely to the U.S. dollar, their optimism may disappear over the next few months.
Please see below:
For context, I warned that consolidation was likely overdue by highlighting the USD Index’s overbought RSI (Relative Strength Index) readings with the red arrows above.
Conversely, the blue vertical dashed lines above demonstrate how the USD Index often bottoms near the end of each month, and rallies often follow. And while the current consolidation may need some more time to run its course, higher highs should materialize over the medium term.
After the USD Index recorded sharp rallies in June and July, consolidation phases unfolded before the uptrends continued. And while the secondary uprisings occurred at more moderate paces, the USD Index still managed to make new highs. As a result, ~98 should materialize during the winter months.
Furthermore, if the forecast proves prescient, the USD Index’s strength will likely usher gold back to its previous 2021 lows.
Adding to our confidence (don’t get me wrong, there are no certainties in any market; it’s just that the bullish narrative for the USDX is even more bullish in my view), the USD Index often sizzles in the summer sun and major USDX rallies often start during the middle of the year. Summertime spikes have been mainstays on the USD Index’s historical record, and in 2004, 2005, 2008, 2011, 2014, and 2018 a retest of the lows (or close to them) occurred before the USD Index began its upward flights (which is what happened this time around).
Furthermore, profound rallies (marked by the red vertical dashed lines below) followed in 2008, 2011, and 2014. With the current situation mirroring the latter, a small consolidation on the long-term chart is exactly what occurred before the USD Index surged in 2014. Likewise, the USD Index recently bottomed near its 50-week moving average; an identical development occurred in 2014. More importantly, though, with bottoms in the precious metals market often occurring when gold trades in unison with the USD Index (after ceasing to respond to the USD’s rallies with declines), we’re still far away from that milestone in terms of both price and duration. Again, the recent move higher in the USD Index doesn’t necessarily apply in the case of the above rule, as it was not the strength of the USD but the weakness in the euro that has driven it.
Likewise, with the USD Index now approaching its long-term rising support line (which is now resistance), a rally above the upward sloping black line above would invalidate the prior breakdown and support a move back above 100.
Also, please note that the recent medium-term rally has been calmer than any major upswing witnessed over the last 20 years, where the USD Index’s RSI has hit 70. I marked the recent rally in the RSI with an orange rectangle, and I did the same with the second-least and third-least volatile of the medium-term upswings.
The sharp rallies in 2008 and 2014 were of much larger magnitudes. And in those historical analogies, the USD Index continued its surge for some time without suffering any material corrections.
As a result, the short-term outlook is more of a coin flip. However, the medium-term outlook remains profoundly bullish, and gold, silver, and mining stocks may resent the USD Index’s forthcoming uprising.
Just as the USD Index took a breather before its massive rally in 2014, it seems that we saw the same recently. This means that predicting higher gold prices (or silver) here is likely not a good idea.
Continuing the theme, the eye in the sky doesn’t lie. And with the USDX’s long-term breakout clearly visible, the wind remains at the dollar’s back. Furthermore, dollar bears often miss the forest through the trees: with the USD Index’s long-term breakout gaining steam, the implications of the chart below are profound. And while very few analysts cite the material impact (when was the last time you saw the USDX chart starting in 1985 anywhere else?), the USD Index has been sending bullish signals for years.
Please see below:
The bottom line
With my initial 2021 target of 94.5 already hit, the ~98 target is likely to be reached over the medium term (and perhaps quite soon), mind, though: we’re not bullish on the greenback because of the U.S.’ absolute outperformance. It’s because the region is fundamentally outperforming the Eurozone, the EUR/USD accounts for nearly 58% of the movement of the USD Index, and the relative performance is what really matters.
In conclusion, gold, silver, and mining stocks pulled rabbits out of their hats on Dec. 16. However, as 2021 has demonstrated, their daily tricks often lose their allure fairly quickly. Moreover, while it’s uncommon for magicians to reveal their secrets, the precious metals tip their hands time and time again. As a result, the USD Index’s daily weakness was likely a corrective downswing, while the precious metals’ daily strength was likely a corrective upswing. And with a reversal of fortunes likely to occur over the medium term, gold, silver, and mining stocks may lose their magic touch.