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How the USD Index Is Affecting Precious Metals


The current situation the index's market appears bearish.

In What Does Silver's Recent Weakness Mean?, I describing several interesting facts about the US Dollar. I wrote the following:

I've recently read something that can elucidate the enormous, almost incomprehensible, size of the US government debt. The numbers are so huge that it's difficult for most people to get a handle them.

If you spent $1 million each day from the time of the establishment of the ancient city of Rome -- about 2,700 years ago -- until today, you would have accumulated about $1 trillion in debt. But hold on. You would have to double that figure to get to the $2 trillion in foreign debt that must be repaid or refinanced each year by the US government, a feat accomplished in only a few short years.

It doesn't take a genius in economics to understand that when you print an ever-increasing supply of fiat currency, it will inevitably lose its value.

Since fundamentals are one thing, and the short-term situation is quite a different thing (people, and thus markets that they create tend to act emotionally in the short-term), I decided to also provide you with the analysis of USD charts. Let's begin with the long-term chart:


The long-term USD Index chart didn't change much since the previous week. Back then I wrote:

Silver and gold managed to rise without the positive influence from the dollar, which is generally a bullish sign. Moreover, it suggests that precious metals may move higher even if the USD Index rallies as well. Just a few days of data aren't enough to get overly excited about this phenomenon (that's why our Correlation Matrix doesn't reflect that), but it serves as a subtle clue that if we saw another up-leg in the USD Index we wouldn't need to be very afraid that precious metals would tumble dramatically.

Precious metals continued to show strength despite the fact that USD Index didn't tumble. This is positive for the precious metals, especially that this phenomenon has been visible for a few weeks now.

Since the correlation between USD Index and the precious metals market has been decreasing lately, further strength in the US Dollar doesn't have to automatically translate into lower prices of gold and silver.

Generally, if precious metals are able to rise even along with higher values of the USD Index, it usually means that the sentiment is very positive for metals, and once USD finally declines, precious metals are to soar.

This time, however, we need to consider the fact that gold is trading very closely with the main stock indices, which were moving higher during the past several days.

The analysis of volume (of the ETF PowerShares DB US Dollar Index Bullish (UUP), which is a proxy for the USD Index) confirms the aforementioned point.


The USD Index crawls slowly higher despite lower volume, which is a bearish sign for the US Dollar, and bullish for the precious metals (after all, precious metals are priced in dollars).
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