Euphoric US Dollar Slams Gold / Commodities / Gold and Silver 2022

By Zeal_LLC / July 09, 2022 / marketoracle.co.uk / Article Link

Commodities

The euphoric US dollar rocketingstratospheric to extreme multi-decade highs slammed gold this week!  That vertical surge ignited heavygold-futures selling, hammering gold into a serious technical breakdown.  The resulting sentiment damage was severe,with traders now convinced gold is doomed to spiral much lower.  But a major reversal is imminent in theradically-overbought dollar, which will catapult gold higher.

Gold has two primarydrivers, investment demand and gold-futures speculation.  Investment capital flows are much-larger andultimately far-more-important.  Butbecause of the extreme leverage inherent in gold futures, speculators punch wayabove their weights in influencing gold price action.  They totally dominate gold when investors aremostly missing-in-action.  And the USdollar’s fortunes are their main trading cue.

Each gold-futurescontract controls 100 ounces of gold, worth $180,600 entering this week.  But traders are only required to maintain $7,200cash margins in their accounts for each contract traded.  That makes for maximum leverage of 25.1x, overan order of magnitude greater than the 2x legal limit in the stock markets.  At 25x, each dollar traded in gold futureshas 25x the gold-price impact of a dollar invested outright!

But that kind ofleverage is exceedingly-risky, as a mere 4% gold move against speculators’ betswipes out 100% of their capital risked. Always facing fast total ruin, these traders’ time horizons are forcedto be ultra-short-term.  They can onlycare what gold prices are doing in coming hours or days, even weeks are toodistant.  That extreme-leverage-necessitatedmyopia often leaves gold inversely slaved to the US dollar.


The leading dollarbenchmark is the venerable US Dollar Index, which was birthed a half-centuryago in March 1973.  It is now dominatedby the euro, which commands fully 57.6% of the USDX’s weighting!  The Japanese yen, British pound, and Canadiandollar are way-less-consequential at 13.6%, 11.9%, and 9.1%.  Normally the US dollar meanders gradually,but in recent months it has soared parabolic in a monster rally.

This first chartsuperimposes the raw US Dollar Index over a technical construct called theRelative USDX or rUSDX.  It simply dividesthe daily USDX close by its 200-day moving average, yielding multiples that revealhow stretched this world reserve currency is in constant-percentage terms.  This flags when the US dollar is reallyoverbought or oversold, which greatly increases likelihoods for imminent majorreversals.

This rUSDX flattens thisbenchmark’s 200dma to plane at 1.00x, which the dollar travels around tendingto form horizontal trading ranges. Those are defined based on rUSDX action over the past five calendaryears.  This indicator’s current extremely-oversoldsupport level is 0.95x, while its opposing extremely-overbought resistance zonestarts at 1.04x.  Normally the USDX doesn’tbreak these boundaries for long.

But since Q2 dawnedseveral months ago, the euphoric US Dollar Index has rocketed parabolic defyingalmost all precedent.  Astounding dollar buyingblasted it to a mind-boggling 1.090x its 200dma in mid-May, and 1.091x thisweek!  These are among the most-extremedollar-overboughtness levels on record. This is neither normal nor sustainable, which guarantees the USDX needsto reverse sharply lower soon.

In early January 2021,the USDX birthed a major new upleg out of a deep 2.8-year low.  Over the next 14.0 months into early March2022, this currency gradually powered 10.9% higher in a perfectly-normaluptrend.  Its moderate upslope was sustainable,as the USDX rarely grew overbought and mostly stayed between its lower supportand upper resistance.  That even includedin the turmoil after Russia invaded Ukraine.

That normal gradualdollar rally wasn’t a problem for gold, which still climbed 4.2% over thatexact span.  And inside that over exactlyone year leading into early March 2022, gold actually rallied to great 22.0%gains!  Even a stronger dollar behavingnormally usually doesn’t shake loose big gold-futures selling.  The hyper-leveraged specs mostly respond to suddenbig-and-sharp USDX moves, which force them to react.

Those flared from lateMarch to mid-May, when huge anomalous dollar buying catapulted the USDX anamazing 7.1% higher in just six weeks!  That parabolic dollar surge ignited when the USDX was already quiteoverbought based on the rUSDX’s trading range, at 1.033x.  That overboughtness stretched to an off-the-charts-extreme1.090x when the dust settled, which was truly extraordinary dwarfing most precedent!

The last epic dollarsurge erupted during March 2020’s pandemic-lockdown stock panic, when the USDXsoared 8.2% in only two weeks!  But eventhat merely left the rUSDX running 1.049x, and such extremely-overbought levelsproved short-lived like usual.  Throughall of Q2’22, the rUSDX averaged 1.066x which is unbelievable!  Such a sudden big-and-fast dollar spikeslammed gold 5.7% lower during that six-week span.

So what the heck happenedto fuel this blistering USDX soaring to such exceedingly-overboughtlevels?  There were three drivers, theplummeting US stock markets, the most-extreme hawkish pivot the Federal Reservehas ever executed, and European Central Bank dithering crushing its euro.  All of these events were incredibly-unusual,together they are totally-unique, and they are neither sustainable norrepeatable.

Burning stock marketsignite big safe-haven demand for the US dollar, as traders flee to cash.  During that six-week span into mid-May where theUS Dollar Index’s parabolic 7.1% surge erupted, the flagship S&P 500 USstock index collapsed an ugly 14.6%! This same dynamic is what launched the USDX 8.2% higher in less than twoweeks in March 2020, as the S&P 500 cratered a brutal 16.1% in that same panicspan.

But the US stockmarkets started sliding in early January 2022, and it wasn’t until later in mid-Junewhen the S&P 500 formally entered bear-market territory ultimately falling23.6% on close.  So flight-capital buyingwasn’t the sole driver of the USDX’s epic parabolic surge.  The unprecedented extremely-hawkish Fed is definitely the primary reason the dollar soared stratospheric, driven byFed-official jawboning and actions.

In mid-March 2022, the Fed’sFederal Open Market Committee deciding monetary policy ended itszero-interest-rate policy in place since March 2020’s stock panic with a25-basis-point rate hike.  In late Marchas the USDX started rallying, major Wall Street banks started predicting larger50bp hikes at the FOMC’s coming meetings in early May and mid-June.  The Fed indeed lifted its federal-funds rate another50bp at the former.

That hike alone wasreally-hawkish, the first 50bp one the FOMC had dared since way back in May 2000!  And the Fed chair predicted more 50bp hikeswere coming, although he effectively took 75bp off the table after that early-MayFOMC meeting.  Adding to its extremehawkishness, the FOMC released its plan for its second quantitative-tighteningbond-selling campaign to start unwinding its epic QE4 money printing.

Between March 2020’s pandemic-lockdownstock panic and mid-April 2022, the Fed mushroomed its balance sheet aludicrous 115.6% or $4,807b higher!  Thatradically-unprecedented quantitative-easing money printing more than doubledthe US monetary base and thus effectively the US-dollar supply in just acouple years!  That’s why inflation is raging out of control,far more money bidding up prices on everything.

In early May the FOMC declaredQT2 would start in June, then quickly ramp up to $95b of monthly bond sellingin just three months!  That monetary destructionwould dwarf the failed QT1 in every way, which took an entire year to reach a far-smaller $50b-per-monthterminal velocity.  That combination of morebig rate hikes and big QT coming proved the most-hawkish Fed pivot by far in its entire century-plus history!

Currency traders areheavily focused on yield differentials between countries, with higher interestrates driving capital inflows to chase better returns.  In just a couple months the ultra-aggressiveFed had killed both ZIRP and QE4, and started reversing both by hiking fast andannouncing QT2.  Meanwhile the ECB was draggingits feet despite soaring Eurozone inflation, with its main interest rateactually below zero!

Since September 2019,the ECB’s deposit-facility rate has been negative 50bp.  That left a gaping chasm between it and theFed’s FFR running near a positive-88bp midpoint after early May’s meeting.  So the euro was increasingly sold in favor ofthe US dollar, amplifying the latter’s gains. Remember the USDX effectively is the euro, since that common currencynow accounts for over 4/7ths of its entire weighting.

Gold’s performanceduring those six weeks the dollar skyrocketed into mid-May actually provedquite resilient.  The yellow metal onlyfell 5.7%, less than the USDX’s extreme 7.1% rally!  During that March-2020 episode where the USDXsoared 8.2% in under two weeks, gold had collapsed 11.2% on extremegold-futures selling.  And bottoming near$1,811 in mid-May 2022, gold held near major uptrend support.

That should’ve been theend of both that anomalous dollar soaring and the resulting gold-futures sellingslamming gold lower.  Indeed the radically-overboughtUSDX retreated a sharp 3.0% into late May, helping gold rebound 1.7%.  But gold-futures speculators weren’tinterested in buying, and investors were missing-in-action heading into gold’s usual summer doldrums in June.  Weak seasonals left gold’s bounceanemic.

Meanwhile the Fed’sextreme hawkishness continued to mount.  Inearly June, May CPI inflation came in red-hot and worse-than-expected soaring8.6% year-over-year!  That was thislowballed-headline-inflation gauge’s hottest print since December 1981!  Fed officials panicked again on that, shatteringtheir forward guidance to float a 75bp trial balloon in the Wall StreetJournal the next trading day.  That sooncame to pass.

At the FOMC’s mid-Junemeeting, they executed a colossal 75bp rate hike which was the first ofthose since November 1994!   They nearly doubled their year-end-2022 FFRoutlook from a 1.88% midpoint in mid-March to 3.38%!  And the Fed chair himself said additional big50bp or 75bp hikes were likely at the FOMC’s coming meetings.  With the FFR near +1.63% compared to the ECB’s-0.50%, the euro plunged again.

Meanwhile the ECBkept dithering in June while Eurozone inflation raged from long years ofthe ECB’s own excessive money printing.  Earlylast month ECB officials finally pledged to hike rates at their next meeting inlate July, but only by 25bp.  That would stillbe the ECB’s first hike since July 2011! The ECB also said it would finally end its QE as July dawned, severalmonths after the Fed with no hint of any QT.

That propelled the USDollar Index back up to multi-decade highs in both mid- and late June,though gold still held its own drifting between $1,806 to $1,856 in the secondhalf of last month.  The worst of thesummer doldrums had passed, and gold was still mostly hovering near its own200dma.  Gold’s resilience through Q2’s monsterUSDX rally is evident in its own Relative Gold chart, using the same methodologyabove.

But the heavygold-futures selling between mid-April to mid-May and then again in mid-June hadleft the yellow metal weak.  The worstthing about speculators’ extreme gold-futures leverage is resulting outsized goldmoves affect investors’ sentiment. With gold not yet reflecting this biggest inflation super-spike sincethe 1970s, investment selling started picking up in late June.  Quarter-end window dressing played a role.

Investment funds haveto report their holdings to their investors after each quarter.  So they often sell a quarter’s losers and buywinners to make their picking look better. The best high-resolution daily proxy for global gold investment demandis the combined holdings of the leading and dominant GLD SPDR Gold Shares and IAUiShares Gold Trust gold exchange-traded funds. They started wilting in recent weeks.

From mid-April tomid-May during specs’ initial gold-futures puking on that skyrocketing dollar,GLD+IAU holdings fell 3.6%.  But as goldstabilized into mid-June, they rebounded a decent 1.4%.  Then heading into quarter-end with goldlanguishing seemingly oblivious to red-hot inflation, they shrunk another 1.8%.  That left gold at $1,806 exiting June, nearspeculators’ gold-futures stop losses which cluster by round prices.

Gold was still holdingits own last week despite lofty USDX heights. Those were partially driven by the ECB already welshing on ending QE in July.  In order to fight yield fragmentationbetween well-run core countries and heavily-indebted peripheral ones, the ECBpresident pledged a new QE campaign starting in early July just weeks after theECB said QE was ending!  That left theeuro reeling entering this new quarter.

The other side of quarter-endwindow dressing is fund managers’ herd chasing early in new quarters.  These professional money managers are rarelycontrarians, extrapolating current trends persisting for the indefinitefuture.  So they love to pile into winners to chase upside momentum, and sell losers which they assume will keepspiraling lower.  Thus thewildly-overcrowded long-US-dollar trade was aggressively joined.

So this Tuesday astraders returned from the long US holiday weekend, extreme US-dollar buyingblasted the USDX a humongous 1.3% higher!  That unleashed heavy gold-futures selling, likelyshorting although we won’t know for sure until the latest weekly Commitments-of-Tradersreport released after this essay was published. So gold cratered 2.2% to $1,768 as gold-futures stop losses weretriggered, devastating sentiment.

The euro collapsed 1.6%that day, nearing parity with the soaring US dollar!  That herd rush into the dollar and out of theeuro and gold continued this Wednesday, with another sizable 0.5% rally leavingthe USDX way up at 107.1!  That was anextreme 19.7-year secular high, and extraordinarily-overbought levels withit stretched way up to 1.091x its 200dma! The euro fell another 0.8%, while gold lost another 1.6% to $1,740.

As this rGold chartshows, that was a serious technical breakdown for the yellow metal.  Its longstanding uptrend support was shatteredin just two trading days this week, driven by these anomalous dynamics.  Heavy gold-futures selling slammed gold loweron the euphoric long-dollar trade, which spawned another big 1.7% GLD+IAU-holdingsdraw in Q3’s opening few trading days. This was a total bloodbath for gold.

But these extrememoves aren’t sustainable, and have to soon reverse sharply given how stretchedboth the USDX and gold are.  While the formeris crazy-overbought at 1.091x its 200dma, gold is now deeply-oversold at just0.944x its own!  That’s nearing the 0.92xextremely-oversold zone in rGold’s own five-year trend.  Neither super-overbought nor super-oversoldlevels last long, since they exhaust buying and selling.

Today’s extreme dollargreed has probably sucked in almost all traders willing to buy high.  Conversely the extreme euro and gold fear haslikely scared away nearly all traders susceptible to being frightened intoselling low.  That leaves nothing butsellers for the USDX and nothing but buyers for the battered euro and gold!  Speculators’ gold-futures positioning was already excessively-bearish before this week’s selloff.

Every CoT week’s latestdata on this is analyzed in our popular newsletters.  CoT data current to Tuesday closes isreleased late Friday afternoons.  Thelatest available before this essay was published was current to June 28th.  Then speculators’ total gold-futures long andshort contracts were running 1% and 71% up into their past-year trading ranges.  Gold’s most-bullish-possible near-term setup is0% longs and 100% shorts.

After gold plummeted2.8% in this newest CoT week ending July 5th on heavy gold-futures selling, we’relikely looking at the most-gold-bullish spec-gold-futures setup in years!  All it will take to ignite massive mean-reversionbuying catapulting gold sharply higher is some news catalyst unleashing overduebig US-dollar selling.  That will likely proveweaker-than-expected major US economic data, which is Fed-dovish.

Despite today’s anomalousgold prices driven by heavy gold-futures selling on an unsustainable monsterUSDX rally, gold’s fundamentals remain strong. It is destined to power far higher in today’s latest inflation super-spike.  During the last couple in the 1970s, monthly-average gold prices nearly tripled during the first then more than quadrupled in the second!  Gold prices will adjust much higher to reflectmonetary excess.

Collateral damage fromgold’s recent aberrant plunge crushed the gold miners’ stocks.  While gold is down 15.2% at worst over 3.9months since early March’s peak on Russia invading Ukraine, the leading GDX gold-stockETF has collapsed 34.5% since mid-April! The gold stocks are even more oversold than gold, ready toreverse and soar in a massive mean-reversion higher as gold-futures buyingresumes soon.

So for contrarian tradersmentally-tough-enough to really walk the walk in buying low, these batteredgold stocks are a phenomenal buying opportunity.  As these unsustainable USDX, euro, and gold anomaliesreverse, the gold miners’stocks will soar amplifying gold’s upside. GDX typically leverages material gold moves by 2x to 3x, with the smallerfundamentally-superior mid-tier and junior gold miners doing far better.

If you regularly enjoy myessays, please support our hard work!  Fordecades we’ve published popular weekly and monthly newslettersfocused on contrarian speculation and investment.  These essays wouldn’t exist without that revenue.  Our newsletters draw on my vast experience,knowledge, wisdom, and ongoing research to explain what’s going on in the markets,why, and how to trade them with specific stocks.

That holistic integratedcontrarian approach has proven very successful. All 1,296 newsletter stock trades realized since 2001 averaged outstanding+20.0% annualized gains!  While we suffereda mass-stopping during gold stocks’ latest plunge, we’re rebuilding our tradingbooks with cheap fundamentally-superior mid-tier and junior gold and silverminers to ride their coming upside.  Subscribe today and get smarterand richer!

The bottom line isdollar euphoria just slammed gold.  Currencytraders stampeded into an already-wildly-overcrowded long-dollar trade to chaseupside momentum.  That catapulted the USDollar Index up to unsustainable extraordinarily-overbought levels.  New multi-decade dollar highs spookedgold-futures speculators into dumping even more contracts, hammering gold evenlower into deeply-oversold territory.

But such anomaloustechnical extremes on both sides can never last long, and will soon reversesharply.  The likely catalyst is thisextreme Fed hawkishness moderating on weakening US economic data.  That will ignite snowballing USDX sellingwhich will bludgeon it sharply lower.  Gold-futuresspeculators will be forced to aggressively buy to cover their shorts, catapultinggold higher unleashing big long and investment buying.

Adam Hamilton, CPA

So how can you profit from this information? We publish an acclaimed monthly newsletter, Zeal Intelligence , that details exactly what we are doing in terms of actual stock and options trading based on all the lessons we have learned in our market research. Please consider joining us each month for tactical trading details and more in our premium Zeal Intelligence service at … www.zealllc.com/subscribe.htm

Questions for Adam? I would be more than happy to address them through my private consulting business. Please visit www.zealllc.com/adam.htm for more information.

Thoughts, comments, or flames? Fire away at zelotes@zealllc.com . Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!

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