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Dear Fellow Investor,
So far, this week has been a virtual replay of last week. If that continues, look out.
To refresh your memory, last week I told you how gold had posted a record 11-session win streak, broken only by a $5.00 loss last Tuesday. But after that brief pause, it renewed its uptrend with vigor.
Today, the metal once again took a Tuesday break. It’s lost about $5.00 — a virtual replay of last week’s brief drop.
[Late Update: The Dow has had a major late-session correction, giving up a 280-point gain and settling just into the red as I write. In response, gold has erased virtually all of its losses on the day.]
Here’s the big question: Will gold renew its rally tomorrow and keep advancing this week? Well, that depends on what happens with the U.S. dollar.
The Greenback Is In The Driver’s Seat
One thing I didn’t talk about last week was something I’ve been stressing in Gold Newsletter and our Alerts over the past few months: How the dollar has been the primary driver for gold for some time now.
Of course, because the dollar is the world’s reserve currency...and because gold is generally priced in dollars...the two assets tend to have an inverse correlation in any case. When one rises, the other usually falls.
But that inverse correlation has tightened considerably over the last couple of years.
I’ve been tracking this tightening of the relationship generally, but today I came across the latest gold-market report by noted analyst Martin Murenbeeld, in which he put numbers to it.
According to Murenbeeld, the correlation between the Dollar Index and gold was -0.54 in 2012 and -0.59 in 2013. That’s not very close. It tightened in 2014 to -0.85, but loosened again in 2015 to -0.63.
But in 2015 the correlation tightened again to -0.85, and last year it was at -0.83. In short, the dollar and gold have been firmly strapped to a virtual see-saw over the last couple of years: When one fell, the other rose.
Now, many of my friends and colleagues spend much of their time and effort in analyzing the gold market. However, given this very close relationship with the dollar, and considering how much larger the dollar market is compared with gold, I think anyone concerned with gold’s prospects needs to look primarily at what’s driving the dollar.
Because the dollar is what is driving gold.
So Why The Big Drop In The Greenback?
Chuck Butler, a legendary currency analyst who’s written his “Daily Pfennig” market letter for more years than either he or I would care to remember, gave his view on the reasons behind the dollar decline in his commentary this morning.
“You see, tax cuts, lead to unknowns. And traders don’t like ‘unknowns,’” Chuck notes. “The BIG unknown here with the tax cuts is just how much it will help the U.S. economy….Some believe that it’s the medicine that will cure the economy’s inability to grow 3% on an annual basis. And some, like me, believe that it’s too much show and not enough go! So, until the proof of a stronger economy is in the pudding, I think we’ll continue to see the dollar in the woodshed on a more frequent basis....”
I agree with Chuck on this, but I think the more-powerful factor driving the dollar lower is that the “Fed rate-normalization trade” has essentially ended while the “European tightening trade” is just beginning.
You see, vast oceans of hot money slosh around the globe as traders move from one investment theme to the next. In mid-2011, once the Fed announced that QE3 would be its last QE program, traders switched from gold to the U.S. dollar.
They anticipated the next big move — that the Fed would start raising interest rates.
Now that the Fed is well along in its program, there are growing doubts that they’ll be able to hike rates as aggressively as they plan. Moreover, the European Central Bank, the Bank of Japan and the Bank of England are just beginning their own rate normalization programs.
So traders are now moving out of the dollar and into overseas currencies and economies. That’s why the dollar has been trending lower for nearly three years...and why its decline has recently accelerated.
In fact, a support line drawn along the Dollar Index’s bottoms since 2015 shows a key support level right around 90.50 on the index.
As I write, the Dollar Index is trading at 90.42. If it doesn’t hold this support, then far lower levels — with an “80 handle” — lie directly ahead.
Bottom line, the market is telling us that the dollar is headed down. With skepticism that the Fed will be able to aggressively pursue its rate-hike campaign in 2018, and with European central bankers just beginning to ratchet down quantitative easing and beginning the process of quantitative tightening, the dollar will be pressured lower.
And thus, gold will be pressured higher.
This is the time to make sure you’re correctly positioned.
All the best,
Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference
P.S. Remember, the first-ever Money, Metals and Mining Webinar, featuring a “dream team” of experts including Rick Rule, Mike Burnick, Sean Brodrick, Byron King and yours truly is now available out in the open on YouTube.
You can now watch it at your leisure, with no registration required.
I urge you to do so as soon as you can. You’ll discover not only our short-term forecasts for the metals and mining shares, but also our views on the longer-term opportunities.
And we cover more than the precious metals. In fact, we also present some exciting developments in energy metals that, as I said, seem all but certain to deliver huge profits over the coming months.
I can’t recommend this recording enough — everything we laid out is happening right now, but there’s still time to take advantage of the opportunity.
If you’re a serious investor, you should watch this webinar right now. Just CLICK HERE to watch it now.
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