Precious Metals And The Strong Dollar
• The dollar rallies despite rate cuts on the horizon- A higher debt ceiling means lower rates are not a luxury
• The ECB is getting more dovish
• Precious metals remain strong as they wait for the Fed
• Gold is a bull market in all currencies
• Silver needs to stay over $16
Is a strong dollar mutually exclusive with a bull market in precious metals prices? The answer may be no when all currencies in the world are losing value. On Friday, July 26, when the dollar index was trading at a new high on the September futures contract at the 97.80 level, just above the May peak at 97.715, gold did not decline. It seems like the Fed and ECB compete when it comes to monetary policy accommodation. The US economy does not exist in a vacuum. With the rest of the world’s central banks on a consistently dovish path, the Fed has little choice but to join the party.
The aftermath of the 2018 global financial crisis caused the Federal Reserve to take a leadership role in monetary policy stimulus. Low short-term rates and programs of quantitative easing led the ECB and other monetary authorities around the globe to follow. What started as a small and temporary snowball has grown into an avalanche, and the US central bank is now about to get back on a path that it trailblazed. On July 31, the Fed will trim the Fed Funds rate by 25 basis points. The move will mark a significant shift from the path since December 2015 when they first increased the short-term rate from zero percent. The Fed likely hoped that the ECB and the other central banks that followed them into accommodation would follow them out. The Fed cited “crosscurrents” and “uncertainty” about global economic conditions as justification for the coming rate but at its June meeting. The Fed likely went too far when it comes tightening credit in 2018. The anticipated rate cut is more corrective than preemptive. The US central bank is capitulating as it becomes more of a follower than a leader. For that reason, the gold market can rally even as the dollar moves higher because all global currencies are losing value given the addiction to stimulus.
The dollar rallies despite rate cuts on the horizon- A higher debt ceiling means lower rates are not a luxury
The dollar index rose to a new contract high on the September futures when it traded above the May peak at 97.715 to 97.835 on Friday, July 26.
The daily chart shows that the dollar has been moving steadily higher after reaching a low at 95.365 on June 25 in the aftermath of the June FOMC meeting. Friday’s new high came as news broke that President Trump rejected the advice of his chief trade negotiator. Peter Navarro argued that pushing the dollar lower would be a useful tool in trade negotiations in China. While the President has often criticized other nations for devaluing their currencies, he agreed with his Treasury Secretary and Chief economic advisor when it comes to intervention in the foreign exchange market.
The weekly chart shows that the dollar index fell short of the critical level of technical resistance at 98.26 on the upside, but closed at 97.751, not far from the high.
While the administration decided not to intervene to lower the value of the greenback against other currencies, the President continues to pressure the Fed to lower rates. President Trump is not a fan of his appointee to run the central bank. In a tweet on Friday he said:
More criticism will likely follow on July 31 if the Fed only lowers the Fed Funds rate by 25 basis points. Congress recently raised the debt ceiling which means that the price of higher interest rates has gone up when it comes to financing the debt.
Meanwhile, the latest push to the upside in the dollar index came courtesy of the European Central Bank.
The ECB is getting more dovish
While the market expects the Fed to lower rates, the ECB took any of the bearish wind out of the dollar’s sails this week. ECB President Mario Draghi gave another in a long series of dovish speeches about the European economy. The central bank on the other side of the Atlantic prepared the market for lower short-term interest rates and more quantitative easing to address the sluggish state of the European economy.
With short-term euro rates at negative forty basis points, there is room for them to move even lower. After all, Swiss short-term rates are at negative 75 basis points. More accommodation from the ECB will prevent the yield differential between the dollar and euro from narrowing, which supported the level of the dollar index last week. The index has a 57% exposure to the euro currency.
Precious metals remain strong as they wait for the Fed
Even though the dollar rallied to the highs, precious metals price remained stable at the end of last week. A rise in the value of the dollar is typically bearish for gold and silver prices, but in the current environment, the prices did not experience any substantial correction.
As the weekly chart of COMEX gold futures highlights, nearby gold futures were at the $1418.50 level late Friday, well above the breakout level and area of critical technical support at $1377.50. When the dollar index hit highs during the week of May 20, gold traded to a low at $1269, almost $150 per ounce lower.
The weekly silver chart shows that at over $16.40 per ounce, the precious metal remains not far below its high for 2019. During the week of May 20, silver traded to a low at $14.325, $2.10 lower.
I believe the strength in gold and silver in an environment where the dollar is at the highs is a commentary on the value of all currencies.
Gold is a bull market in all currencies
Gold is telling us that all foreign exchange instruments are declining in value. I have been writing this for weeks, but it is worth repeating, as the trend for over the past decade in gold in all of the leading currencies is compelling.
Gold in euros is at the highest level since 2012, and the trend since 2005 has been higher.
Gold in Japanese yen terms is at an all-time high and has been in a bullish trend since 2001.
Gold in Australian dollars is at a record peak. Gold in almost all foreign exchange instruments is telling us that the value of paper money is declining. Therefore, it should come as no surprise that a rising dollar is not weighing on the price of the yellow metal.
Silver needs to stay over $16
When it comes to silver, investment demand will drive the price over the coming weeks and months. If gold continues to make higher highs, the odds favor a rising silver price. Silver has a long history as a volatile commodity that moves more on a percentage basis than the yellow metal when a trend develops. Silver has the potential to explode to the upside since gold is above its 2016 high while silver remains $4.67 per ounce below its peak from that year. If silver is heading for a challenge of the $21.095 post-Brexit high, an over 28% gain could be in the cards for the precious metal.
Silver needs to remain above the $16 per ounce level to keep bullish momentum intact. Silver rose above its first level of technical resistance at $16.20 per ounce during the week of July 19. Over the past three weeks, the price has remained above $16.345 on the nearby futures contract.
Gold and silver could be heading for higher highs over the coming days, weeks, and months. The price action in the two most closely-watched precious metals is a function of the decline of fiat currencies around the world. Monetary policy accommodation has become the norm rather than the exception. If the US decides to intervene in the currency markets to push the dollar lower, we could see explosive moves in gold and silver. Even if the dollar continues to gain, the recent price action is telling us that a strong US currency and a rising gold price is possible.