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Surging US Dollar in 2017 a Catalyst for Gold Bottom

Cory
December 29, 2016

Here is a recent article from Jordan Roy-Byrne from TheDailyGold.com. On the recent weekend show Jordan and I spoke about the potential of the spiking US Dollar signaling a bottom for the gold price (click here to listen to that interview). The takeaway however is that for gold to have a sustainable run up the US dollar needs to be putting in a significant top. I guess we will see…

Gold has suffered recently in the wake of higher real interest rates while the US Dollar, thanks to higher yields has reached a 14-year high. Stronger real rates hurt Gold but so does a stronger US Dollar, which remains the dominant global currency. In addition to falling real interest rates Gold likely needs the US Dollar to approach a major peak. It may sound perverse to gold bugs but the sooner the US Dollar climbs and the stronger it gets, the closer Gold could be to the start of a new bull market.

Gold is now officially in its longest bear market ever. If we define a bull market as a multi-year advance then Gold has endured five bear markets over the past 45 years. Four of the five are plotted in the chart below. The current bear market has followed the trajectory of the 1987-1993 and 1996-2001 bears but with more downside.

dec272016goldbearanalog

Gold Bear Analog

 

Although Gold’s current bear market is the longest ever, its counterpart, the US Dollar is not yet in its longest bull market ever. It would need to rise for nearly another year to achieve that feat. The chart below shows that this run in the greenback has more room to rise. The trajectory of the current bull has closely mirrored that of the 1978 to 1985 bull. If that continues then the US Dollar index could reach 110 in the first half of 2017 and 120 by the end of the year.

dec272016usdollarbulls

US Dollar Index Bull Analog

 

The two major peaks in the US Dollar (1985 and 2001) coincided with important lows in Gold. However, it is important to note that essentially all of the price damage to Gold during the corresponding bear markets occurred well before the US Dollar peaked. The chart below was inspired by an article from ReadTheTicker. After Gold’s bottom in 1982, the US Dollar surged 37% but Gold only penetrated its previous low by 5%. From Gold’s low in 1999 the US Dollar advanced 17% while Gold did not make a new low.

dec272016goldusd

US Dollar Index & Gold

The bottom line is Gold could be setting up for an epic bottom when the US Dollar becomes strong enough to cause global problems and induce policy more favorable to Gold. History shows that the majority of price damage in Gold bear markets has occurred in the earlier stages of US Dollar bull markets. A higher US Dollar will certainly push Gold lower from here but probably not too far below the 2015 low. A precursor to Gold’s turn will be when it shows strength against foreign currencies and equities while the US Dollar is rising.

We reiterate that we do not want to buy a bunch of investment positions until we see sub $1100 Gold coupled with an extreme oversold condition in bearish sentiment. We certainly see bearish sentiment and some good values in the gold stocks at present. However, some of these good values could become great values before next summer. For professional guidance in riding the bull market in Gold, consider learning more about our premium service including our favorite junior miners for 2017.

Jordan Roy-Byrne, CMT, MFTA

Discussion
18 Comments
    Dec 29, 2016 29:11 AM

    I bought 1000 GDX at 8am for 20.40. Waiting for an oil correction that is very possible as it is at major resistance and the stock market is weakening and headed to 2200 at least.

    Dec 29, 2016 29:15 AM

    Gold should rally as far as 1200 to 1220 before it fails again. Those waiting for 1100 will miss a short powerful rally.

    b
    Dec 29, 2016 29:31 AM

    If I recall JRB said in a previous article he saw gold bouncing to about 1157.
    Gold was at about 1130?
    Definitely tradable, good call to those pointing it out the last few days.

    80% of my list is up, 60% of it up about 10%, sure will be coin in it when gold sustains a move.
    No fun in potshares today, maybe they finally have broken the relationship to gold.

    Dec 29, 2016 29:21 AM

    Any surging the dollar does in 2017 will likely be to the downside.

    http://stockcharts.com/h-sc/ui?s=UUP&p=W&yr=3&mn=9&dy=0&id=p48730394677&a=480294658

      Dec 29, 2016 29:38 AM

      The Dollar index had a bullish consensus of 97% on Dec 17 and hit a high on Dec 20. Like gold has shown us in the last 10 days, an extreme of emotion either way usually marks a turn.

      Both gold and the dollar have turned and the next month will surprise most of the people watching. Matthew got it exactly right.

        Dec 29, 2016 29:13 AM

        Robert – I always appreciate your insights. Your book was an excellent read. I rate it alongside James Dines “Mass Psychology” in terms of investing lessons learned, or perhaps unlearned. Well done!

          Dec 29, 2016 29:29 PM

          Rand:

          Thank you for your nice comments. I hope you left a review. I wish I had Jim Dines way with words. He is a past master.

            Jan 01, 2017 01:38 AM

            Indeed I did, at amazon.com

        Dec 29, 2016 29:23 PM

        I hope you are right. Right now my call for a bottom in gold at $1124 (based purely on Matthew’s charts and my own bearishness) a couple of weeks ago looks good. I hope this move in the miner shocks everyone.

          Dec 29, 2016 29:27 PM

          Spanky, the action today was very good in a number of ways that the nice gains, alone, do not show. I think your 1124 call will hold up.

    Dec 29, 2016 29:23 AM

    There’s a very good chance that the yen will trend higher from here for quite awhile.

    http://stockcharts.com/h-sc/ui?s=%24XJY&p=W&yr=5&mn=5&dy=0&id=p87861533039&a=496233029

    Dec 29, 2016 29:25 AM

    Matthew, your market calls must be accidental unless you were pitching horseshoes and got a few up your ying yang! LOL! DT!

      Dec 29, 2016 29:24 PM

      Whatever my calls are due to, my portfolio of miners is up more than 4.8 times since the January low. If not for my poor timing with Galane, it would be a little better.

      Many doubt it right now, but next year will probably be better than 2016, overall.

    Dec 29, 2016 29:30 AM

    What happened to EX, he must have been on a pub crawl with Irish Tony and fallen into a sinkhole. I warned him about going on a drinking binge with Irish.

      Dec 29, 2016 29:07 PM

      DT…EX is fine. He will be back as soon as he sleeps it off . He’s a bit of an amateur when it comes to the Good Stuff…………… Man we sure did enjoy the crac.

    Dec 29, 2016 29:45 PM

    Great article and charts. I share the sentiments that we have a ways to go but not too long.
    My guess is that we reach a bottoming period around late fall 2017/ winter 2018 where $1000 needs to be broke and then some.
    A bottom doesn’t happen until some capitulation in sentiment occurs where people figuratively throw their hands up. My guess is we start heading towards $900 for that to happen.

    Dec 29, 2016 29:06 PM

    Interesting theories. I say lets have Jordan on in seven of eight months to see how his USD predictions and gold price fare.

    Dec 29, 2016 29:07 PM

    sorry, I meant seven OR eight months