The dollar rally over the past year has certainly been impressive. After trading flat for over two years, the USD index suddenly came to life and rocketed from 79 to 100 in just under a year. And while the USD index is simply a measure of the U.S. dollar relative to other fiat currencies, a gain of 27% in such a short time period rarely occurs.
In fact, it has only happened one other time in the past 20 years and that was during the 2008 financial crisis, as investors rushed to the liquidity and perceived safe-haven of cash. However, the latest advance has generated an even stronger gain than the dollar rally that occurred during the 2008 financial crisis. It is almost as if the dollar knows something that the stock market does not yet fully comprehend.
It is worth mentioning that oil and the Baltic Dry Index (BDI) are also behaving as if we are in the midst of a major financial crisis, yet the stock market keeps chugging higher. At some point, these will need to be an accounting of this odd behavior and I think it will translate into a major crash in stocks.
But let’s get back to the end of the dollar rally. The USD index failed to hold above 100, an obvious psychological resistance level that many traders track.
Weak economic data and dampened expectations for a major rate increase in 2015 are also weighing on the dollar. The USD has put in lower highs ever since the failure to break decisively above 100 in March. In fact, the USD has been declining for three straight weeks now and continues to drop today (-1.6%) ahead of FED comments.
We could see technical support for the dollar index around 95, which was previous resistance. However, any drop below this level and there isn’t much in terms of additional support until the 85 level. This would represent a huge retracement of the gains experienced in the past year and could throw the USD back into its longer term downward trajectory, in place since 2002. This would make sense, given the increased movement of de-dollarization around the globe.
Gold has held up rather well in the face of the dollar rally. It is down just 7% in the past year, despite the 27% rally in the USD. Furthermore, gold is in the green during 2015, even though the dollar has rallied roughly 5% year to date. In some ways, it appears that gold has foreshadowed the end of the dollar rally and investors have started piling heavily into oversold mining stocks. The GDX is up 11% thus far in 2015, greatly outpacing the 1.3% gain in the DJIA. It turns out that stocks have not been the best place to put your money this year and I believe this trend is just getting started.
The geopolitical landscape is also turning increasingly bullish for precious metals, particularly with recent actions from Russia, China, Venezuela, Greece, and Iran. These are just a few of the reasons that we are forecasting a bottom for precious metals and strong rally throughout the remainder of the year and into 2016. A weakening dollar will add magnify the gains in gold and silver going forward. Furthermore, mining stocks remain undervalued relative to the metals. I believe quality miners will offer investors the greatest returns, as they return to offering excellent leverage to the increase in gold and silver prices. We have already seen this start to occur in 2015 and it is just a prelude to the big move that is coming.
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