It’s like the final scene out of a typical horror movie…
The hero is standing over the lifeless body of the villain. All of us in the audience breathe a sigh of relief. The terror is over.
The hero turns away and lets down his guard. Shockingly, the villain then jumps to his feet and stages one last attack.
That’s what the dollar did over the past month.
Think about it…
Back in mid-June the dollar was dying.
The combination of record budget deficits, money being dropped from helicopters, and trillions of dollars in new “stimulus” spending was just too much for the old buck.
The U.S. Dollar Index (USD) was at its lowest level in the past three years. It was dying. And, just about everybody in the precious metals, cryptocurrencies, and commodities markets let down their guards.
Then the buck bounced back. The USD is up nearly 3% over the past month.
That may not sound like much of a move to folks who are used to watching “meme stocks” rally 50% overnight, or “funny money” cryptos pop 100% in a week. But, a 3% gain in a currency in just one month is a HUGE thing.
And, it was enough to cause terror among traders of gold, Bitcoin, copper, and a whole bunch of agricultural commodities that typically trade counter to the dollar. All of those assets have fallen hard over the past few weeks as the dollar has rallied.
But, regular readers of Market Minute knew not to let down their guard. We noticed the dollar was tracing out a bottoming pattern in mid-June.
We knew how this sort of horror movie tends to play out. And, we figured a rallying dollar would stall the rallies in counter-dollar assets.
That’s exactly what happened…
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Now though, the horror show is over. It looks like the dollar rally has ended, and the dying currency is ready to decline again.
Take a look at this chart of the U.S. Dollar Index (USD)…
The month-long rally in the U.S. dollar pushed the MACD and RSI momentum indicators at the bottom of the chart well into extremely overbought territory.
Then last week, the dollar broke down below the support of its 9-day exponential moving average (EMA – blue line). This action shifts the short-term momentum of the chart from bullish to bearish.
The red vertical lines on the chart mark each time over the past year the USD has been in extremely overbought territory AND broke below its 9-day EMA.
The previous two times this happened, the USD entered an intermediate-term downtrend lasting anywhere from two to three months and knocking about 5% off the value of the buck.
Something similar this time around would have the USD breaking down to a new 52-week low by the end of summer. That’s bad news for the dollar, of course. But, it’s good news for folks buying gold, silver, and other commodities.
So, if you didn’t take advantage of the oversold conditions in gold three weeks ago, then you ought to add some exposure to gold right now.
It sure looks like the dollar rally is over, and that means the new gold rally is just getting started.
Best regards and good trading,
Jeff Clark
Reader Mailbag
Did you take advantage of the conditions in gold a few weeks ago? If so, do you think it’s finally time for gold to start a new rally?
Let us know your thoughts – and any questions you have – at [email protected].