Precious Metals Spot Price vs. Dollar: The Battle for Ascent

Precious Metals Spot Price: Will it Rise Alone or Ride with the Dollar?

Updated Dec 2022

Analyzing this article, we will first adopt a historical perspective. Those who neglect to learn from history are destined to relive it. Additionally, this article provides real-time insights into the positions we took and our performance. We believe that those who talk the talk should walk the walk, and this piece serves as a testament to our actions matching our words.

Keep on sowing your seed, for you never know which will grow — perhaps it all will. Albert Einstein,1879-1955, German-born American Physicist

Let’s examine a few charts to see what Precious Metals and the Dollar are doing and where they might be headed shortly.

The dollar has rallied very intensely easily taking out the lower end of the targets we projected several months ago. It almost closed above 81 every month. Had it done this, it would have made the outlook even more bullish. The dollar has gone on to put in a series of new 9-month highs, and thus, by contrast, one would have expected Gold and the other precious metals to do the opposite. However, this has not taken place.

Precious Metals Spot Price Charts

Looking at the Gold chart, it’s notable that despite reaching a nine-month high, Gold didn’t even dip to a four-month low. This suggests a robust development, indicating a good chance for Gold to rally to the 1170-1200 range before a pullback. On longer time frames, Gold showed negative divergence signals, with the most significant ones mentioned below.

Palladium stands out as an impressive metal, showing resilience even during the dollar’s massive rally. If the precious metal sector maintains this strength, there’s potential for a substantial upward surge once the dollar rally slows down. Back in 2008-2009, when Palladium was overlooked, it emerged as the top-performing precious metal last year and is holding up better than others.

Silver, on the other hand, has faced significant challenges. Its inability to surpass 2008 highs might be an early warning for the precious metals sector, especially the gold industry.

On longer time frames, Gold has signalled various negative divergences, including the dollar making a higher low while Gold achieved new highs, and the GDX, XAU, and HUI failing to reach new highs despite Gold bullion surging.

While there’s potential for Gold to stay in a prolonged consolidation phase, the longer it trades sideways, the more explosive the subsequent rally could be. However, there’s also the possibility of a sharp correction if the Dollar surpasses the 82 price point level.

Navigating the Economic Landscape: Insights into a Potential Precious Metals Rally

When it comes to precious metals, a longer consolidation phase could be on the horizon, triggered by a potential signal tied to the dollar’s performance. If the dollar manages to close above 81 on a monthly basis or sustains trading above 84 for three consecutive days, it may forewarn a more extended correction or consolidation in the precious metals sector.

Fundamental Reasons for Dollar Woes:

1. **Current Account Deficit:** The US grapples with a growing current account deficit, nearing 6% of its total economic activity. This trend, seemingly on the rise, poses concerns for the long-term stability of the dollar.

2. **Daily Funding Needs:** With a staggering need to attract $1.8 billion daily to bridge the current account gap, the sustainability of this scenario comes into question.

3. **Government’s Stance:** Despite public declarations of a strong dollar policy, the US government tends to favour a weaker dollar. This benefits exports and facilitates debt repayment with devalued dollars, especially considering the colossal borrowing rates.

4. **Inflation and Hard Assets:** The government’s inflationary measures impose an implicit tax on the masses, compelling a shift towards hard assets like precious metals, lumber, and oil as a hedge against devaluation.

5. **Mounting National Debt:** The national debt, currently at $12.4 trillion, doesn’t encompass unfunded liabilities like social security and Medicare. The combined levels soar to unprecedented figures, raising concerns about the nation’s fiscal health.

6. **State Budget Challenges:** A staggering 44 states face budget shortfalls, with California projecting spending 50% more than its revenue. The cumulative state deficit since 2007 raises worries about long-term fiscal stability.

7. **Potential Rate Hikes:** To sustain funding needs, the Federal Reserve may have to raise interest rates, attracting overseas investors demanding higher returns. While this may strain the fragile economy, it could usher in a favourable environment for precious metals in the long run.

As we explore these fundamental factors, the precious metals sector stands poised for potential resilience and growth amid the complex economic landscape.

Precious Metals Spot Price and The US dollar

The US dollar has been showing unusual strength and has refused to correct, with no decent period of trading below 80. If it closes above 81 on a monthly basis, it could potentially trade to and past 90 before topping out. However, in the short-term time frames, the Dollar is overbought and a pullback is expected from current prices to around the 78 range.

Gold, on the other hand, has been gaining strength as well and has not followed the dollar by putting in a new nine-month low; instead, it has put in a higher low. However, on the longer time frames, Gold has flashed several powerful negative divergence signals that need to be neutralized, with two of these negative divergences mentioned above. Therefore, the potential for Gold to correct or consolidate for several more months remains high until the above signals are neutralized, or a new buy signal is issued on the weekly timelines.

Despite the strong dollar, Gold is holding up remarkably well, and if this pattern continues, the next breakout is expected to be very explosive. Our long-term outlook for the dollar is that it will put in a series of new all-time lows in the next 12-24 months. From a long-term perspective, all sharp pullbacks should be viewed as buying opportunities. However, as a subscriber, it is recommended to wait until a buy signal is issued.

Precious Metal Spot Prices Update July 2019

We have a bullish MACD crossover on the monthly charts, and for the first time in years, the trend is mildly positive. Now if Gold manages to close above 1500, then a test of the 1800 ranges with a possible overshoot to 1920 is likely. Silver is a laggard, and it will only start to take off after the action starts to heat up in the Gold markets, but Silver is likely to outperform Gold Bullion in percentage terms. The pattern (currently) is more potent for Bitcoin than it is for Gold; however, things could change fast. In the short term time frames, though, Bitcoin investors should consider waiting for Bitcoin to let out some steam before deploying new capital.

When it comes to Gold stocks, GFI looks interesting, and it is also the fourth-strongest stock in the sector in terms of relative strength. Entry points in the 4.50-4.70 ranges would be a good place to establish a position.DRD is another exciting play, albeit one that carries a bit more risk due to its volatile nature, and it would make for a good long in the 2.90-3.00 ranges.