A Dollar Continued Dollar Rally Might Not Be Nice To Gold

1.) GOLD – There are few other macro assets that are more important than the US Dollar. I asked the question last week if stocks and the US Dollar could do well together. For years, the dollar has acted as a safe haven, so when we see the US Dollar Index rise, we start to take notice and wonder if money is leaving the investment party. The Dollar Index tends to fall when capital moves back into stocks, commodities, emerging markets, and everything else tied to global growth. I also pointed out that a stronger dollar doesn’t automatically mean stocks have to fall. There’s history for that, like in the late 1990s, when global capital wanted U.S. stocks, U.S. technology, and U.S. dollars all at the same time. While stocks may rise alongside the dollar, many other assets don’t handle dollar strength nearly as well. The setup today with the U.S. Dollar Index futures looks a lot like what we saw coming out of the 2020 and 2021 lows. That’s when the dollar carved out a massive reversal pattern, while CFTC data showed speculator positioning moved from deeply negative territory back above zero. Speculators had been leaning the wrong way, then positioning started to turn, and then price broke out. Currencies like the euro, the Polish zloty, the British pound, and others are breaking down to new lows, which is one of the reasons the Index (DXY) is moving higher. So, again, some stocks may be fine, and some may even benefit from a Dollar rally. But precious metals, emerging markets, and other dollar-sensitive trades could have a much harder time. Gold has been one of the great winners of this cycle. But it has been struggling since its end-of-January top. When you overlay the U.S. Dollar Index with gold, the problem becomes pretty obvious. Here’s the deal: if the dollar continues higher from here (which is becoming more probable as the days wear on), I’m willing to bet that gold will go down in value. The hard part for goldbugs is that $3,500 would not be a surprise with a rallying Dollar. Is that a siren? No. It just means the conditions are there for something bad to happen, and investors should probably stop pretending it looks normal. The Dollar rallied hard in 2022, and we all know how equity markets handled that (not well). I’m not saying every risk asset is doomed, or this has to be a repeat of 2022. What I am saying is that the dollar is breaking out, and precious metals are trading horribly. Investors need to keep an eye on the Dollar.

2.) OIL – Oil is trading in a very oversold condition right now, which brings two points with it. Assets in a bearish trend condition tend to crash from oversold conditions. But, at the same time, a rally to the 200-day moving average would not be surprising, considering how oversold oil is. The 200-day is at about $75 as oil is trading at about $70 right now. On the side of pushing oil lower is that tanker traffic through Hormuz is recovering but remains well below pre-collapse levels. Activity has clearly moved off the lows seen from late February through early June, but the rebound is still modest versus the 50-80 tanker-crossing range seen earlier in the year.

3.) YIELD CURVE – the 10YR Treasury Yield minus the 2YR continues to decline/squeeze. That’s not ideal from a macro-view. Does that ensure a recession if the curve inverts – 2’s above 10’s? No. In fact, Goldman Sachs just came out with their research and they reduced their estimate of US recession risk for the next 12 months from 25% to the long-term norm of 15%. That’s below most economists' estimate of 20% on the eve of the war. So, the curve can continue to tighten and nothing may change from a macro perspective. We do know, however, that the bean counting of growth (GDP) and inflation (CPI) are suggesting a paired deceleration in July (June data). Markets do not tend to like it when growth and inflation decelerate together.