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

The euphoric US dollar’sepic parabolic surge over this past half-year continues to sorely vex gold.  The dollar’s vertical march to extremesecular highs spawned heavy gold-futures selling, slamming gold.  The resulting lower gold prices have scaredaway investors, leaving gold languishing near deep lows despite an inflationsuper-spike raging.  This fundamentally-absurdmarket anomaly can’t last, and is overdue to reverse.

Gold is behavingterribly this year, plunging 17.9% between mid-April to late September!  That has left even hardened contrariantraders disheartened, increasingly wondering if gold is dead.  Speculators and investors alike want nothingto do with history’s ultimate inflation hedge, even with headline Consumer-Price-Indexinflation averaging stunning 8.5% year-over-year gains over the last sixmonths.  Gold looks broken.

While gold was being slammedlower by relentless gold-futures dumping, the CPI peaked in June at a cyclehigh up 9.1% YoY.  That proved itshottest read since way back in November 1981!  So we are literally suffering through a brutalinflation super-spike today, the first since the 1970s.  The Fed’s extreme money printing after March2020’s pandemic-lockdown stock panic has come home to roost, driving up prices.

Gold skyrocketed duringthose 1970s inflation super-spikes,as it should.  The first was born in June1972 at a CPI trough up 2.7% YoY, then peaked 30 months later in December 1974with the CPI soaring 12.3% YoY.  Themonthly-average gold prices during that span soared 196.6% higher!  Gold’s supply growth is heavily constrainedby mining limitations, so it is bid way up during times of serious currencydebasement.

The next inflationsuper-spike followed soon after, starting at a CPI up 4.9% YoY in November 1976then running 40 months cresting up 14.8% YoY in March 1980.  Monthly-average gold prices skyrocketed 322.4%in that span, more than quadrupling! So gold getting clubbed like a baby seal during the worst inflation byfar since then is crazy-irrational.  Thereason is the equally-nonsensical parabolic surge in the US dollar.

During that exact 5.5-monthspan into late September where gold paradoxically collapsed 17.9%, thebenchmark US Dollar Index soared a stupendous 14.2% higher!  That is an incredibly-big-and-fast move for amajor currency, which usually slowly meander like glaciers.  That blistering USDX surge catapulted it to anextreme 20.4-year secular high of 114.2 in late September, spawning relentlessgold-futures selling.

I analyzed this pasthalf-year’s heavy-to-extremegold-futures puking in depth in last week’s essay.  In a nutshell, speculators are able to runcolossal leverage up to 29x trading gold futures!  That enables them to punch way above theirweights in bullying around gold prices, but is exceedingly risky.  That forces these guys to have ultra-myopictime horizons often measured in hours, so they obsess over one trading cue.

That’s the fortunesof the mighty US dollar.  Thegold-futures guys watch the USDX like hawks, then do the opposite.  The dollar’s epic parabolic surge over the lastsix months is the overwhelmingly-dominant reason gold has sucked wind so dreadfully.  That’s readily evident comparing these USDXand gold charts, which look like symmetrical mirror images since mid-April whenthe US dollar started shooting vertical.

In addition to theusual technicals, these are special Relativity charts revealing overboughtnessand oversoldness.  Relativity looks at pricesas multiples of their own 200-day moving averages, which tend to formhorizontal trading ranges.  Mid-2022’s extremeprice action has left the lofty USDX extraordinarily overbought and batteredgold extraordinarily oversold.  Thatmeans both are overdue for massive reversals!

When the US dollar is behavingnormally, gold-futures speculators’ monomaniacal obsession with it fades.  Between early March 2021 to early March 2022,gold powered 22.0% higher despite a parallel 7.2% USDX rally!  Before that in the second half of 2020, bothgold and the dollar corrected.  So goldisn’t always slaved to the US dollar’s fortunes, although it certainlyfeels like it during this year’s crazy extremes.

These competing currencieswere both bid sharply higher in late February 2022 into early March on big safe-havenbuying after Russia invaded Ukraine.  Injust a couple weeks, gold and the USDX blasted 8.0% and 3.1% higher.  But that left gold quite overbought tradingat 1.131x its 200dma, and geopolitical spikes are always short-lived.  Traders soon come to accept whateversurprising news initially fueled them.

Gold needed to correct afterthat overextension and did, plummeting 6.6% in a week.  That was enough to work off the greedysentiment, so gold stabilized and resumed grinding higher into mid-April regaining$1,977 while the USDX ran 99.9.  That waswhen the US dollar started decoupling from reality, rocketing parabolic as raging inflation ravaged its purchasing power.  Gold-futures speculators aggressively fled inresponse.

The increasingly popularand overcrowded USDX soared in three distinct surges since then, which are detailedin this chart.  That included the initialhuge 10.5% rally in just 3.9 months, another smaller-yet-still-big 6.9% over1.6 months, then a third massive 8.5% soaring in only 1.5% months climaxing inlate September.  These catapulted theUSDX up to 1.090x, 1.103x, and 1.119x its 200dma, extraordinarily overbought!

Relativity tradingranges are based off the last five calendar years of data, where extreme USDXlevels started at 5.0% over its 200dma. Once that was exceeded, the US Dollar Index usually quickly fell in bigmean-reversion selloffs.  So seeing this leadingdollar benchmark wildly stretched to 9.0%, 10.3%, and 11.9% above its200dma in recent months was eye-popping! Such extremes are incredibly anomalous.

Not surprisingly thattrio of huge USDX surges fueled a corresponding group of steep gold selloffs.  Those gold-futures speculators aggressivelydumped long contracts while adding massive short ones as the US dollar shotstratospheric.  During this same span goldfirst plunged 11.7% in 2.2 months, then dropped another 9.4% in 1.3 months, beforecratering 9.9% in 1.5 months into late September!  It’s been a bloodbath.

Each sequential plungeon heavy-to-extreme gold-futures puking forced gold to extraordinarily-oversoldlevels.  Gold’s own Relativity tradingrange pegs extremely-oversold levels starting at 0.92x its 200dma.  But on the backs of those vertical USDXsurges, gold collapsed to 0.987x, 0.921x, and 0.889x its 200dma!  The latter was gold’s most oversold seensince late December 2016, far exceeding stock-panic extremes.

Realize there’s absolutelynothing normal about the US Dollar Index skyrocketing 14.2% in 5.5 months toextreme multi-decade highs!  And had thatnot happened, there would’ve been no extreme gold-futures dumping and goldwould be trading far higher today better reflecting this raging inflation.  Not only is this epic dollar buying exhaustedand overdue to reverse, but its extreme drivers are fading losing their shockvalue.

The main reason theUSDX skyrocketed was the most extreme tightening ever attempted by theFed.  In its past five FOMC meetingsstarting in mid-March, Fed officials have hiked their federal-funds rate by 25basis points, 50bp, then three monster 75bp hikes in a row!  Early May’s 50bp was the biggest FFR hikesince May 2000, while mid-June’s initial 75bp was the largest since November 1994.  This is a violent hiking cycle.

Never before has theFed catapulted rates 3.0% higher from zero in just a half-year, and it likelynever will again!  These extreme ratehikes were in response to Fed officials panicking about the raging inflation unleashedby their own extreme money printing. From March to September, the headline CPI ran +8.5%, +8.3%, +8.6%,+9.1%, +8.5%, +8.3%, and +8.2% YoY!  Andthat leading inflation gauge is politically lowballed.

The Federal Open MarketCommittee didn’t just launch its most-extreme rate-hike cycle ever, it alsobirthed its most-extreme quantitative-tightening monetary destruction everattempted.  Several weeks ago I wrote awhole essay analyzing how the Fed’s QT2 is imperiling these QE4-inflated stock markets.  Theoverwhelmingly-dominant reason this first inflation super-spike since the 1970sis raging is Fed QE4 money printing.

In just 25.5 monthsinto mid-April 2022, the Fed foolishly ballooned its balance sheet by a truly ludicrous115.6% or $4,807b!  That effectively morethan doubled the global US dollar supply in just a couple years.  That radically-unprecedented deluge of newmoney conjured out of thin air started chasing and bidding up the prices onfar-slower-growing goods and services. The Fed’s profligacy directly fueled today’s raging inflation.

QT2 is necessary tostart unwinding that colossal QE4 money printing since March 2020’spandemic-lockdown stock panic.  While theoriginal QT1 took an entire year to ramp up to its terminal velocity of $50bper month of monetary destruction, QT2 is way more aggressive.  The FOMC started it at $47.5b monthly in June,and promised it would ramp to $95b per month just three months later inSeptember!

So QT2 is ultra-aggressivecompared to QT1, nearly doubling its failed predecessor’s pace after gettingthere in just a quarter the time!  Theunprecedented scale of this monetary destruction made QT2 just as extreme asthe Fed’s parallel super-big-and-fast rate-hike cycle.  Truly nothing like the past six months hasever before been witnessed in Fed monetary policy, and almost certainly willnever happen again so fast.

Traders’ shock at allthis catapulted the US Dollar Index sharply higher, primarily on rate differentials.  The USDX is a basket of six major currencies,dominated by the euro at 57.6% of its total weighting.  The Japanese yen and British pound follow at13.6% and 11.9%.  These three aloneaccount for nearly 5/6ths of this leading US-dollar benchmark!  And the Fed’s blistering rate hikes left themlooking less attractive.

Compared to thepanicking top Fed officials, the European Central Bank, Bank of Japan, and Bankof England were in no hurry to hike rates to fight their own serious inflationproblems.  So sovereign-bond yields on USTreasuries soared to massive premiums over European and Japanese sovereigns.  That attracted vast global capital into the fast-risingUS dollar and better-yielding dollar-denominated bonds.

But it wasn’t just theUS dollar’s improving yield advantage on aggressive Fed hikes that fueled thisyear’s epic dollar surge.  The euro, yen,and pound all have serious problems of their own hastening flight out ofthose currencies and into King Dollar. The euro cratered not just because the ECB was dragging its feet on ratehikes, but because a serious Eurozone recession looks increasingly likely onsoaring energy costs.

Russia’s invasion ofUkraine and European governments’ punitive reactions slashed natural-gasimports, leaving Europe’s economy increasingly vulnerable.  Long Europe’s dominant gas supplier, Russia greatlycurtailed exports even before the primary pipelines were sabotaged.  Resulting sky-high energy prices are tankingsmall businesses and hobbling consumers, lowering other spending which couldforce economic shrinkage.

Despite the Fed’s extrememonetary debasement, the US dollar looked a lot stabler to traders than the crateringeuro.  While the ECB belatedly started hikingrates fast to close the gap with the Fed, the BoJ looks hellbent on holdingrates at zero forever.  Even while theyen has relentlessly collapsed to 32-year lows against the US dollar, Japan’scentral bank is vowing to maintain its doomed yield-curve-control scheme.

It has longaggressively monetized Japanese Government Bonds to artificially manipulatetheir yields under a 0.25% cap.  The BoJcan’t hike rates to defend its cratering yen unless it abandons YCC, and doingthat risks higher yields that could bankrupt that exceedingly-indebtedcountry.  So the US dollar also looks a heckof a lot better to global traders than the yen. The British pound has proven a nightmare lately too.

It recently collapsedto all-time lows versus the dollar after the UK’s new government proposedbig unfunded tax cuts.  That ignited heavyselling in longer government bonds or gilts, catapulting their yieldshigher.  That in turn threatened UKpension funds with margin calls, fomenting a third-world-style currency crisis inthe legendary British pound!  So global tradershave fled that currency to the safer US dollar as well.

But just like the shockvalue of the Fed hiking 300bp off a zero-interest-rate policy and launchingthat outsized QT2 are passing, so will the near panics in the USDX’s threelargest components.  European governmentsare heavily importing liquefied natural gas to offset the lack of Russiansupplies, leaving storage fuller than normal heading into winter.  And the ECB is hiking rates fast, closing thatyield differential.

Since it won’t abandon thatill-fated YCC manipulation, the Bank of Japan will be forced to increasinglyintervene to stop the yen from crashing. That will mean dumping some of its vast $1.2t hoard of foreign-currencyreserves, selling US dollars and US Treasuries to buy up yen.  At sufficient scale, that will help strengthenthe latter at the former’s expense.  Traderswill pile into the recovering yen to ride its upside momentum.

And on the UK front,the Bank of England has won a faceoff with the new government forcing it toresign.  Those pound-killing tax cuts aredead, gilt yields are moderating, and the British currency is rebounding asthat crisis passes.  So the wildly-oversoldpound, euro, and yen are likely to see major mean-reversion buying asthe extraordinarily-overbought US dollar suffers massive mean-reversion sellingin coming months.

Competing currenciesaside, there are plenty of reasons to flee the lofty dollar.  Euphoria and greed are extreme in thisepically-overcrowded trade, which implies all the buyers have already beensucked in.  That leaves only sellers, whichwill fuel cascading downside momentum.  Andeven if the Fed continues hiking its FFR from the current 3.1% to its officials’4.6% target in 2023, serious dollar debasement will persist.

Remember CPI inflationaveraged 8.5% YoY over this past half-year when the USDX soared.  That is still almost double Fed officials’ terminalFFR target, meaning holding US dollars or Treasuries will guarantee big reallosses.  And real-world inflation islikely running over double those intentionally-lowballed CPI prints, so theactual purchasing-power erosion is much worse. Inflation super-spikes are seriously dollar-bearish.

With this euphoricunsustainably-overextended US dollar overdue to collapse soon and mean revertsharply lower, gold is poised to do the opposite.  That relentless heavy-to-extreme gold-futuresselling since mid-April has left speculators’ positioning exceedingly bearishand their capital firepower available for selling exhausted.  That means massive mean-reversion buying is imminent, as I analyzed last week.

Mere mean reversions inthe USDX and gold would return them to their 200dmas, which are running waydown at 103.3 and way up at $1,815.  Butafter sentiment and positioning extremes, prices don’t simply stop at their averages.  Strong momentum-chasing trading fueling mean reversionsnearly always leads them to overshoot proportionally to the oppositeextreme.  That portends far bigger swingsin the dollar and gold.

For gold to recover asfar above its 200dma as it was pounded under during late September’s extremeoversoldness, it would need to soar way back up near $2,017!  And that is just technicals, excluding the massivegold-investment buying coming as the Fed’s inflation continues raging outof control.  So the days of the euphoricUS dollar vexing gold are numbered, these technical and sentimental extremescan’t last.

The biggestbeneficiaries of gold’s huge mean-reversion upleg will be the brutalized goldminers’ stocks.  After being bludgeoned to false panic-level lows,they started to sharply V-bouncewith gold out of recent spec-gold-futures extremes.  While that was interrupted by renewedgold-futures shorting on resurgent dollar strength, gold stocks’ powerful rallywill resume with a vengeance with gold-futures mean-reversion buying.

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, yielding massive realizedgains during gold uplegs like this overdue next major one.  We extensively research gold and silver minersto find cheap fundamentally-superior mid-tiers and juniors with outsized upsidepotential as gold powers higher.  Our tradingbooks are full of them starting to really surge.  Subscribe today and get smarterand richer!

The bottom line is theeuphoric US dollar has sorely vexed gold this year.  The dollar’s epic parabolic rally to loftysecular highs on extreme Fed tightening and other major currencies’ woes unleashedhuge gold-futures selling.  That slammedgold sharply lower despite an inflation super-spike raging out of control.  But the resulting technical and sentimentalextremes in both the dollar and gold are overdue to reverse hard.

This past half-year’s massiveUS-dollar buying and gold-futures selling is petering out, exhausted.  That portends huge mean-reversion-overshootreversals over coming months.  Big dollarselling and big gold buying will cascade, feeding on themselves as tradersincreasingly chase that strong momentum. Given this miserable inflationary backdrop, the debased US dollar needsto head way lower while gold soars way higher.

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!

Copyright 2000 - 2022 Zeal Research ( www.ZealLLC.com )

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.