Monday was another day of learning nothing new about the potential break in direction for certain risk assets. This move up or down seems imminent in the somewhat sideways charts of some risk assets and I continue to think it will be driven largely by the direction of the dollar.
While there’s been a bit of divergence more recently between the dollar and its inverse relationship with the risk assets, this departure is minute at best if we consider the seemingly range bound nature of the dollar that I’ve been talking about over the last month or so.
Specifically, I have made the case that the dollar index looks set to trade in a range between about 77/78 and 82/83 over the next quarter or two while the inner range to that broader range is found between about 80 and 80.83/80.89 with a rough mid-point of 80.40. Until the dollar index moves below 80 or above 80.89, I think we may see the precious metals and equities stall in directionless trading with important exceptions found in the commodity complex such as crude oil and soybeans.
This week I’ll examine – and as slowly as the markets are trading – the potential movement of each of the risk assets in relation to the dollar and I’ll start today with those that feel most ripe to break up or down very soon or gold and silver.
First, let’s look at the dollar index over the last month.
As you can see in the chart above, it has traded mainly in the range found between about 80 and 80.89 and the majority of its closing levels are found in that range as is shown more completely at peaktheories.com.
Now, let’s take a look at gold and silver.
As is shown in the previous charts, gold has traded primarily between about $1,380 per ounce and $1,396 per ounce while silver has traded between about $28.50 per ounce and $29.50 per ounce.
When we put the dollar, gold and silver together for the month of December roughly, then, the dollar has traded mainly between 80 and 80.89 as gold and silver have traded between$ 1,380 and $1,396 per ounce and $28.50 and $29.50 per ounce, respectively. The reason to believe that the dollar’s move above or below that range may steer gold and silver out of sideways trading as well, however, is found on the few outside-of-the-range days for all three.
- The dollar’s high of 81.44 was hit on November 29.
- Gold’s lows of $1,351 and $1,354 per ounce were hit on November 26 and 29.
- Silver’s lows were $26.45 and $26.49 per ounce on November 26 and 29.
- The dollar’s near-lows of 79.07, 79.17, and 79.20 were hit December 3, 6 and 7 and its real lows of 79.10 and 78.82 were hit on December 13 and 14.
- Gold’s highs were hit on December 6 and 7 or $1,427 and $1,431 while its other brush with $1,400 came on December 13 and 14.
Silver’s highs of $30.22 and $30.67 per ounce were also hit on December 6 and 7 while its other brush with the above-$29.50 level came on December 13 and 14.
In other words, the inverse relationship between the dollar and gold and silver that began in August seems to have continued through December.
This gives me reason to believe that once the dollar breaks out of its current inner-range bound trading between 80 and 80.89, gold and silver may also break out of the respective ranges mentioned above. It also provides me with reason to believe that if the dollar moves above this range, gold and silver are likely to move below their respective ranges and vice versa.
While it is very possible that the dollar may move out of its inner range with no effect on gold or silver, the charts of gold and particularly silver are ripe to make a new move up or down. This is true of these two charts more so than the charts of any of the other risk assets that I’ve examined and of the dollar index itself.
Perhaps it will be some other common denominator of gold and silver that will help move this ripeness into a fruition of upward or downward trading action and such a factor will become clear within weeks if not days. Otherwise, I’ve got to believe it will be the dollar and I also have to believe that a more dramatic move by the dollar will move some of the other risk assets more dramatically as well.
Tomorrow, I’ll examine two commodities that have made the break up – for now – perhaps pointing to the idea that the dollar is headed down in the near- to mid-term.
Disclosure: I am long SLV.