A Climbing USDX Means Gold Investors Should Care

Positions in the USDX are shifting from shorts to longs, so gold investors should look closely. Why? Because it’s an inverse relationship.

We’ve discussed the negative correlation between the dollar and the precious metals many times before, but it can never be discussed enough, particularly as the situation develops and the outlook for the USD Index becomes more positive.

Once the USD Index lands some knockout punches, the precious metals will be hurting, as they tend to do when the dollar rises. Gold, silver and the miners will eventually rise, but for the medium-term, they are still in bearish territory.

Counted out, counted down and rarely counted on, investors threw in the USD Index’s towel long before the fight even began. However, after shaking the cobwebs and landing a few haymakers, the greenback’s Rocky-like comeback is proof that ‘it ain’t over till it’s over.’

Let’s look at the factors influencing rise of the USD Index as well as some of the historical patterns:

1. Repositioning from Short to Long

Now, with thousands of screaming fans chanting “USD, USD,” the eye of the tiger could be eying another move higher. As evidence, if you analyze the chart below, you can see that non-commercial (speculative) traders have quietly repositioned from net-short to net-long.

ChartDescription automatically generated

To explain, notice how oversold periods in 2014 and 2018 – where net-speculative short interest as a percentage of total open interest was extremely high – preceded sharp rallies in the USD Index? Thus, with 2021 the most extreme on record, the forthcoming rally should be significant.

How significant? Well, let’s take a look at how things developed in the past – after all, history tends to rhyme.

Let’s focus on what happened when the net speculative positions were significantly (!) negative and then they became significantly (!) positive, so without paying attention to tiny moves (like the one that we saw last summer), let’s focus on the more meaningful ones (like the one that we see right now – the net positions just became visibly positive – over 16%, after being very negative for quite some time.

In short, that’s how the following profound rallies started:

  • The big 2008 rally (over 16 index points)
  • The big 2009 – 2010 rally (over 14 index points)
  • The 2011 – 2012 rally (over 11 index points)
  • The 2013 rally (“only” over 5 index points)
  • The big 2014 – 2015 rally (over 20 index points)
  • The 2018 rally (over 15 index points)

The current rally started at about 89, so if the “normal” (the above shows what is the normal course of action) happens, the USD Index is likely to rally to at least 94, but since the 5-index point rally seems to be the data outlier, it might be better to base the target on the remaining 5 cases. Consequently, one could expect the USD Index to rally by at least 11 – 20 index points, based on the net speculative positions alone. This means the upside target area of about 105 – 114.

1 2 3 4
View single page >> |

Disclaimer: All essays, research, and information found on the Website represent the analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong ...

more
How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.
Mar1kle 2 weeks ago Member's comment

How to you explain the large divergence between Gold and the GDX today? Over the last months (maybe longer?) GDX appears to be a leading indicator for the future direction of Gold. Does GDX up today when Gold is way down concern you?

Przemyslaw Radomski, CFA 2 weeks ago Author's comment

It is indeed a useful indicator, but "one swallow doesn't make a summer". Miners' "strength" should be visible for at least several days before it really tells us something meaningful. I'll elaborate more in today's premium analysis.