very simple update (it ended up being a little less simple, as usual) for a very simple situation. We have noted that an anti-USD ‘inflation trade’ bounce has been in progress. This has featured rising stocks, commodities and yes gold bugs, precious metals. It’s Bob Hoye’s “all one market” syndrome and it is predicated on perceptions of a dovish Fed, a weak US dollar and the momentum of speculators.
While precious metals have largely been on board the ‘inflation trade’, we should remember that the best conditions for the gold mining sector are counter cyclical. So fundamentally at least, a strengthening US dollar (assuming its strength comes along with stock market and commodity weakness) would not be a threat beyond shaking out inflation oriented momentum players.
From Tuesday’s update:
“Technically, USD is at support. If this area fails (it is weak but still in the support zone in pre market) asset markets will likely continue to show strength in the near-term. But this area should be watched closely. A drop below 93.50 would target the lower channel line, probably below 90. If it holds, asset markets (stocks, commodities and precious metals) would be vulnerable.”
USD remains in a downtrend by daily chart but it held the critical support yesterday and is firm in pre-market this morning.
In a post last night (Charts of Interest Today) it was noted that the Gold-Silver ratio was breaking down, the US dollar was firm and that the disconnect between these two would not last. This morning gold is still somewhat weak in relation to silver and so that is a marker against USD. Here is the state of the Silver-Gold ratio, in a stance to break out, which would be ‘inflation trade’ positive (USD negative).
As for the stock market, it remains neutral (with some bullish and some still bearish sub-components) and over bought, technically. It is over valued by many metrics and in my opinion on a leg that will probably prove a bull trap. It is also over bullish, sentiment wise. I for one am going to be very aware of the concept of taking my profits and limiting my losses across the board where the stock market is concerned.
At this point, if the USD continues to weaken, it remains a stock picker’s market. That has included the medical device/equipment space, semiconductors, emerging markets, etc. But risk is and has been high, which is the nature of momentum, when players who thrive on action make their bucks (it’s keeping those bucks that is the tricky part).
If the USD firms, it will likely be time to get out of the pool as the turd named Uncle Buck floats by (sorry). This would of course include commodities. Precious metals are making another bullish signal that seems to imply HUI’s 251 target is upcoming. We’ll see on that, but the reason I have become curmudgeonly on the gold miners (as opposed to royalty and exploration) is because the industry is done no favors by inflationary backdrops. So if there is a disturbance to the gold sector (along with stocks and commodities, with USD strong) said disturbance would actually be a buying opportunity.
As it stands however, the US dollar is merely at support (not recovered), silver is bouncing vs. gold and the ‘inflation trade’ is still intact.