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

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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.

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In terms of sentiment, we already know the depths of gold and the heights of the equity market. The chart below (source) shows the CCI with the positioning of fund managers as surveyed by the monthly Bank of America Merrill Lynch fund manager survey. The current weighting of commodities (in the average fund manager portfolio) is the second lowest in four years!

Continuous Commodity Index
Click to enlarge

Meanwhile, as you'd expect given the skepticism on commodities, sentiment for Uncle Buck has grown more bullish. As per sentimentrader.com, public opinion is currently at 75% bulls. Peaks in the US dollar have occurred with public opinion at 80% bulls. The US dollar has a bit more upside until resistance at 87-88.



Moving back to our original point, the US dollar plays an important role in commodity markets but is not the sole determinant of exact peaks and bottoms. In fact, the US dollar is usually a lagging indicator for gold and gold stocks as shown below. I plot the US dollar inverse, gold and the Gold Bugs Index (INDEXNYSEGIS:HUI). The blue line shows the important bottoms in gold and the HUI and the red line shows the corresponding bottoms in the US dollar inverse. Essentially, the precious metals market will form major bottoms ahead of tops in the US dollar.



What does all this mean going forward? I believe that 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. We already know that sentiment on commodities and precious metals is at dumpster-diver-type levels. Adjust for the US dollar strength and it's clear that these markets are showing some short-term strength amid poor sentiment. That is a positive sign and one we often see ahead of key turning points in these markets. However, the US dollar has some more upside before its next important peak. Precious metals have found a bottom and are moving higher, but they won't embark on their next big move until the US dollar peaks. At my firm, we've carefully added to longs in recent weeks but will remain patient in our anticipation of the next big leg higher later this year.

Editor's Note: See more from Jordan Roy-Byrne at The Daily Gold.
No positions in stocks mentioned.

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