2023-07-17 16:42:47 ET
Summary
- I expect a major decline in the USD to coincide with huge breakouts in precious metals gold and silver.
- The USD broke below key supports after the 12th straight decline in US inflation numbers. Bond yields are still elevated but are likely to follow the USD lower.
- Falling inflation, coupled with a new BRICs currency backed by gold, are likely to push the USD lower, and support precious metal prices.
I believe we are on the cusp of a major decline in the USD, which will likely coincide with precious metals gold ( GLD ) and silver ( SLV ) breaking out higher from huge multi-month bases.
The price action on the technical charts of the USD and precious metals is supportive of this scenario, and there are key macro catalysts that I believe are behind this development.
We could be looking at a huge opportunity to accumulate precious metals right now.
Let me dive straight into the technical charts.
The Dollar Index, which shows how the USD trades relative to a basket of its peers, has cracked below the key 100-101 support. The USD had been in a range all through 2023 - not anymore. This breakdown could pave the way for its next leg lower, towards the 90 level in my opinion.
Weekly Chart: Dollar Index
The sharp move lower in the USD this month was due to US CPI coming in weaker at 3% year-on-year, versus 3.1% that was the consensus.
This is the 12th straight decline in the US CPI, and if the post-Covid inflation continues to trend lower, it is a real possibility that the USD returns to its 2021 lows. After all, that was when the Fed embarked on its rate hike trajectory to combat inflation.
US PPI and CPI YoY Chart
The Fed is still erring on the side of caution by keeping interest rates high, which explains why bond yields (such as the US10Y) are still at elevated levels. However, we are now seeing a divergence in bond yields and the USD, and I believe the former will eventually follow the latter lower.
Weekly Chart: US10Y Yield
If we see both the USD and bond yields decline, I believe precious metals will (finally) breakout higher from their massive ranges.
Spot gold has been in a range for 3 years, since 2020. As the saying goes: "the larger the base, the higher in space". If and when spot gold breaks out of this range, the breakout is likely to be extremely powerful in my view.
Weekly Chart: Gold
For historical reference, just look at the strength of the uptrend when gold broke out higher from a 6-year base back in 2019. Gold prices rose more than 50% in a year once it broke out.
Monthly Chart: Gold
Silver is the higher-beta cousin of gold, and is my choice trading vehicle if precious metals are to embark on a bull run. Silver, similar to gold, has also been range-bound for months. A breakout from this range would likely be extremely powerful.
Weekly Chart: Silver
Another chart to look at to confirm a bull market in precious metals is the gold-to-silver ratio. I want to see the ratio break down, which would mean silver outperforming gold. This ratio is now testing the lower bound of a wedge pattern. A breakdown could be imminent.
Weekly Chart: Gold to Silver Ratio
Another macro catalyst that is likely to support precious metals higher, and push the USD lower, is news that the BRICs countries are planning to launch a gold-backed currency .
If and when launched, this new currency will likely lead to the repricing of assets and commodities away from the USD. The new currency's intrinsic value is also backed by precious metals, which creates stability. In contrast, the USD is not backed by real assets, and its supply is subject to the printers of the Federal Reserve.
For further details see:
Major Decline In USD, And Rise In Precious Metals, Could Be Imminent (Technical Analysis)