The Turning Points and the US$/Gold Relationship
Trader Scott’s Market Blog
December 4, 2016
There is a post here about the relationship between gold and the US$, which might be good to read before going on. We hear constantly about all of the relationships between markets which supposedly exist. And the problem with these “theories” is they work some of the time, maybe most of the time, but they break down at the most important times. Meaning they break down at the big turning points (potential entry points) or they breakdown when some of the most explosive moves are about to occur. In other words, they work until they don’t, and that is a dangerous way to approach markets. I am fully aware of the general relationship between the $ and gold. It has kept me from making an ass out of myself like so many of the goldbug gurus, who claim every year gold will end the year at $2000. (But to be fair, most of the economic theories about the stock and bond markets are just as useless.) There is some magical belief, by way too many, in the theory which claims the price of gold is a mirror image of the $. And one of the biggest problems with those who believe in said theory, is they then reverse the theory to suit their own biases. (And biases are deadly in markets, if they go unchecked.) So what happens is, because since they’re blindly bullish on gold, therefore the $ must be about to crash, because gold can only soar if the $ crashes. And going along with this is the claim the US$ is not actually going up because of all of the new Federal Reserve Notes being printed. Even though the $ index is at multi-year highs. It’s hard to get through to these folks, but I’ll keep trying. The folks who write in to argue these theories don’t bother me at all, but the scum who profit from this trash are disgusting.
And I’m shocked by how little simple research (yes time-consuming) goes into the “work” of so many gurus, but just viewing a few charts should be enough to change some minds. It would be helpful to view these charts side by side. The $ chart and the gold chart over the last 20 years shows several instance when the $ bad/therefore gold good relationship (and visa versa) fell apart (please ignore the squiggly lines for now). The brutal 19 year and 6 month bear market in gold ended on July 20, 1999. But as you can see from the annotated charts, the $ ran from under 100 to 121 and yet gold was just biding it’s time, albeit in a volatile manner. Then when the $ did top in July 2001, gold was well off the July 1999 lows. In other words, at this major secular turning point, those believing in the magical relationship would have been too scared/rigid/confused to buy gold into possibly its’ greatest entry point ever. So then we see the huge bear market in the $ until the bottom in March 2008. This then allowed the shackles to come off of the gold price as it eventually quadrupled. And here the relationship came back into force, as gold (for other reasons also at that volatile time) had a significant correction in the bull market. So then the $ bottomed in March 2008. But when gold bottomed in October, it more than tripled as the $ just traded sideways, but not down. Then we get to the big top in gold on September 6, 2011, and we can see the $ never went lower this whole time. Can you see where this discussion is going? And if you continue thru the chart you can continue to see more divergences. So my continued posting about this topic about market relationships is about how they work until they don’t, so the main focus should instead be on the great entry point into the individual markets themselves. But at times, we should understand we need to temper our expectations about how much of a move we can expect once we/re in. For instance, I have expected to see the topping process in the $ to begin around Q2 next year. That topping process could go on for a while with rallies and reactions (distribution), but the end to the relentless rise may be enough to begin to take some pressure off of gold. So the point is, my approach to markets is about identifying the highest probability/lowest risk entry points into markets (price/time) and do a really good job at that (risk control). And also do a good job with managing those trades/investments once I’m in (risk control). It’s very easy to make this job overly confusing. But working hard and always being prepared will dwarf all the extraneous stuff where we are trying to “decipher” and “figure out” all of the time. So doing the little things in this job every single day is way more important.
And as to gold currently, I have laid out my strategy several times recently (like here) and it hasn’t changed. It’s basically my accumulation strategy once we traded below $1191. It’s trading this area and using profits to slowly (as this will take time) build a position. But as I’ve recently laid out, this time last year I was focused on gold and the miners, this year it’s been silver and the miners – using gold as the proxy, meaning using the pushes lower in gold (breaks of support) to buy the others instead. And lastly, just watch what happens to the gold/US$ relationship when the Euro bank problems get back into the headlines. The time is getting closer and closer, and it should be of great focus to all of us. Tonight’s “no” vote in Italy is just another small step towards that time. These small steps are all part of the single most important situation – the loss in confidence in central banking. The recent bond market selloff is being blamed on Trump. That’s ridiculous – it’s been in the works since 2008. The massive distribution in the global bond market, with the blow off insanity of negative rates, is the “reason” for the bond sell off. The bull market in bonds is over, and the central bankers are losing control – the bond market is “telling” us.
Trader Scott has been involved with markets for over twenty years. Initially he was an individual floor trader and member of the Midwest Stock Exchange, which then led to a much better opportunity at the Chicago Board Options Exchange. By his early 30’s, he had become very successful in markets, but a health situation caused him to back away from the grind of being a full time floor trader. During this time away from markets, Scott was completely focused on educating himself about true overall health and natural healing which remains a passion to this day.Scott returned to markets over fifteen years ago where he continues as an independent trader.
December 5, 2016 @ 10:48 am David V.
Timely post, both gold and the dollar down this morning contrary to the prognostications of Italy’s no vote. Gold is looking weak.
December 5, 2016 @ 12:05 pm traderscott
Right, I’d like to see gold and USD start to align more. And gold has a chance again today to ram it higher from the new lows. Nonetheless, it was a chance to cover some of short term hedges and let the market rally again.
December 5, 2016 @ 2:23 pm David Parker
The “manipulators” pushed gold down to $1158 today from where it has bounced higher. GDX continues to make higher lows. USD is down and looking toppy. At a minimum we should see a bounce from an oversold condition.
December 5, 2016 @ 2:36 pm traderscott
And yes David that was pure manipulation and allowed them to cover more shorts. They need to get more aggressive and urgent on the buy side. But it does allow some other folks to do some accumulating into the pushes lower.
December 5, 2016 @ 5:28 pm David V.
Provided the Fed raises rates, might there be any deleveraging with all the margin debt in play. How will that bode for some the mining shares which have gotten ahead of the low metal prices.
December 5, 2016 @ 6:23 pm traderscott
A rate rise is mostly factored in, so that is fairly neutral at this point, but you’re correct in that the stock market is not pricing in any problems. There is a lot of momentum in the stock market still, but the volatility is coming back in. I do expect one more push to new highs. And then more volatility to set up something bigger. As far as miners, I’m agnostic on the miners’ outperformance. There is the stock market part of miners which is always there, like last January.
December 5, 2016 @ 4:25 pm Q
Great Post Scott. Love the bigger picture stuff as you know. I personally think the shift to a multipolar world and the multipolar war on cash are signs and factors too.
And as you say it is until it isn’t.
‘They say life’s a game and then they take away the board.’
Alan Moore V For Vendetta.
December 6, 2016 @ 1:19 pm traderscott
Yes Q,the chinks in the US$ dominance are adding up, but that is down the road. We have to get thru this period first. The $ itself needs to set up technically. Its’ strength will be its’ demise. The major top in the $ will probably be around a lot of fanfare about the euro project failing, Merkel losing, Fed stepping up its’ rate increases, etc. But what I’m beginning to get interested in is the possibility of the ECB beginning to hint at raising rates.