Next US Dollar Peak Is Catalyst for Precious Metals, Hard Assets

By Jordan Roy-Byrne Mar 22, 2013 10:30 am

2013 will mark an important transition year as the equity market is likely to make a cyclical peak while commodities make an important cyclical bottom.

The tile of this piece seems obvious. We all know that the US dollar tends to be negatively correlated with commodity prices. This is true in the short-term but not always so over the long-term. The US dollar index is currently nearing 83. It’s at the same level it was in 2007 when gold was trading in the $600s and the CCI (currently 554) was trading near 400. The US dollar index is near the same level it was at the end of 2005 when gold was trading below $400 and the CCI was trading below 300. This tells us that the bull market in precious and hard assets goes way beyond simple US dollar weakness. It is driven by long-term supply and demand dynamics as well as rampant monetary inflation from global parties and not just the USA. Throughout this bull market, key advances and turning points have originated from strength against foreign currencies and then sustained strength amid textbook US dollar weakness.

First let’s take a look at gold priced in US dollars and then gold priced against the inverse of the US dollar (a foreign currency basket represented by the PowerShares DB US Dollar Index Bearish ETF (NYSEARCA:UDN)). Note that gold/UDN is often a leading indicator for gold in US dollars. Gold/UND bottomed in the summer of 2008 and made a higher low in October, when gold bottomed. Gold/UDN broke to new highs in early 2009 while gold didn’t break to new highs until September 2009. The same happened in early 2010 as gold/UDN broke out first. At present, there are no major divergences but gold/UDN has been quite a bit stronger than gold in recent weeks.

Gold UDN chart

Meanwhile, we have similar observations when looking at commodities via the CCI and UDN. During 2010 CCI/UDN broke to new highs in the spring while CCI didn’t break out until September. CCI/UDN peaked ahead of the CCI by a few months in early 2011. Currently, CCI/UDN is showing a positive divergence. A close above 22 would be quite telling as commodities would be at 18-month highs when priced against foreign currencies.

CCI UDN chart

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