The Soaring Dollar Crushes The Commodity Rally

By Craig Hemke

Just last week, it appeared that a general rally in commodities was underway.

Gold, silver, the base metals and crude oil were all soaring. But now, less than one week later, prices are falling sharply. And why?

Blame the HFTs that trade the digital derivative contracts.

They've "seen" the sudden, sharp rally in the US dollar, and they've been quick to dump their metals exposure as quickly as they bought it last week.

Across the mainstream media, you'll see headlines like, "Investors Shunned the Yellow Metal Today as..."

Yeah, whatever. You likely know better by now.

Want to really see why COMEX gold has fallen so sharply? Just plot it with the euro.

Below you see a 10-day chart of COMEX gold (in blue) and the EURUSD (in candlesticks). We can use the euro as a proxy for an inverse of the dollar index because the euro is weighted at about 60% of the index.

We discussed this rather thoroughly three weeks ago. If you missed the article then, here's the link to review it now: https://www.sprottmoney.com/Blog/the-gold-price-dr...

You see, in 2018, gold does NOT trade on fundamentals.

All the "analysts" that talk their book by making it seem as if physical supply, physical demand, ETF inflows, Shanghai withdrawals, imaginary "waves" and the like actually matter are either clueless or disingenuous.

At this point in the ongoing crisis, the only factors that impact the dollar price of gold are relative changes to the "value" of the US dollar and US interest rates. The digital price ebbs and flows, and the Bullion Banks manage physical supply to that price.

That's it. That's all.

Can this ever change? OF COURSE!

What we patiently await is the moment of critical mass, when demand for all forms of gold (futures, ETFs, allocated physical, bars/coins, etc.) outstrips the ability of The Bullion Banks to keep up.

Perhaps it will come simply through a gradually rising price. Perhaps it will come with the next iteration of The Great Financial Crisis. Perhaps it will come due to geo-politics and war. Who can say for sure? But this moment of critical mass WILL come. That much is certain.

For now, however, the concern is the rally in the US dollar.

The dollar index has jumped up and through the 91 level, and this is certainly NOT a good sign for all the reasons laid out above. If it doesn't reverse by the end of the week, we could be looking at ANOTHER 150 pips of upside taking it all the way to 92.50-93.00.

YUCK! Let's hope not. If that happens, the likelihood of another Gold Spec Wash below the 200-day become quite likely.

Three Spec washes last year all drove price about $40-45 below the 200-day before things turned around. A similar wash now would take price to $1,270 or so. Again, YUCK.

We'd all rather not have to deal with this again, but IF the dollar index heads to 93, we may not have a choice.

The first chart below is from December 2017, and it shows the price and CoT changes during the three declines south of the 200-day moving average last year.

The second chart projects where a similar Spec wash would move price now.

Again, let's hope we're spared the frustration of another temporary selloff in COMEX gold (and silver).

However, given the ongoing strength in the US dollar, those looking to stack more physical metal at lower prices may soon get their wish.

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities. Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

The views and opinions expressed in this material are those of the author as of the publication date, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.