Gold Loses Silver's Support As Dollar Dominates

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Includes: AGQ, BAR, BLNG, CEF, DBP, DBS, DGL, DGLD, DGP, DGZ, DSLV, DULL, DZZ, FXE, GEUR, GHE, GHS, GLD, GLDI, GLDW, GLL, GLTR, GTU, GYEN, IAU, IAUF, JJP, OUNZ, PALL, PGM, PHYS, PLTM, PPLT, PSLV, PTM, QGLDX, SGOL, SHNY, SIVR, SLV, SLVO, SPPP, UBG, UGL, UGLD, USLV, USV, ZSL
by: Clif Droke

Summary

Euro weakness plus dollar strength is bad news for gold.

Gold has also lost the immediate-term support from silver.

A cash position is still warranted until the U.S. dollar index weakens.

The main headline driver for gold's recent weakness remains the ongoing strength in the U.S. dollar. Meanwhile, the June rally in the silver price, which would normally have buoyed gold, turned out to be nothing more than a "head fake" as silver has given back its recent gains. Gold now finds itself back in the same position it has been stuck in for most of this spring, namely in a position of weakness. In today's commentary, we'll examine the trends which point to a continuation of this dynamic in the short-term outlook.

If there is one overriding theme for the last couple of months it has been the absolute dominance of the dollar in the global financial market. The dollar's rising value has fed into weakness among the emerging markets, foreign currencies, and even the precious metals mining arena. Gold in particular has suffered as the U.S. dollar index (DXY) continues its upward climb in what has essentially been a manifestation of increasing strength in the domestic economy.

U.S. Dollar Index

Source: BigCharts

The dollar has also been bolstered by the ongoing quantitative easing (QE) of the ECB as the eurozone remains somewhat fragile. The ECB is currently increasing money supply in the eurozone by purchasing €30bn of assets each month, this total will be reduced to €15bn per month after September and will be halted in December of this year.

Although the ECB recently unveiled plans for gradually exiting its QE program, the bank also stated it doesn't anticipate increases in interest rates at least through the summer of 2019. This has led to continued downward pressure in the euro currency, which in turn is reflected in a stronger dollar. Shown below is the daily graph of the Invesco CurrencyShares Euro Trust (FXE), which is a useful proxy for the euro. The graph speaks for itself as to the continued downward pressure of the euro currency in the immediate term.

Invesco CurrencyShares Euro Currency Trust

Source: BigCharts

On the precious metals front, the price of silver has collapsed and in just the last couple of sessions has given back all its gains from the rally earlier this month. The iShares Silver Trust (SLV), my silver proxy, is now back in a state of immediate-term limbo as the ETF's price is below its 15-day moving average as SLV threatens to test its low for the year.

iShares Silver Trust

Source: BigCharts

The significance of this weak performance to gold is that silver's failure to follow through with its recent rally attempt means gold has lost a major immediate-term support. Historically, sustained rallies in the silver price have preceded meaningful rallies for gold. Thus gold has lost yet another pillar of support in its continued fight for relevance in a market characterized by increased risk-seeking among investors. This "risk-on" attitude among participants is bad news for gold as the yellow metal feeds off risk aversion and benefits from investor fear.

For now the immediate-term (1-4 week) trend of my favorite gold trading vehicle, the iShares Gold Trust (IAU), remains down. As I've emphasized in recent commentaries, until the U.S. dollar index shows significant weakness, gold isn't likely to catch any breaks anytime soon. Accordingly, we need to see a sharp pullback in the dollar index (DXY) to give gold its next opportunity to rally and reverse its immediate-term decline.

iShares Gold Trust

Source: BigCharts

On a strategic note, no new trading positions are currently recommended in gold or the gold ETF (IAU) for now. As I emphasized in the previous report, investors should avoid the temptation to catch the proverbial "falling dagger" by attempting to time the bottom for gold. This strategy rarely works out well and is to be avoided due to its inherent risks. I continue to recommend a cash position for now.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.