A Quick Look At Gold And US Dollar (Going In Tandem)

On September 30, 2018 I published a short piece on the US dollar. The conclusion was as follows:

…if something cannot go up pushed by hordes of optimists, it is supposed to go down. Summarizing – I am bearish on the US dollar in the medium term”

After nearly one month the situation has not changed too much. Over that period:

• The bears (big speculators betting on a weaker US dollar) increased their bets by 1.5 thousand contracts
• The bulls (big speculators betting on a stronger US dollar) added 2.4 thousand contracts to their bullish bets
• As a result, the total balance was positive for the bulls – a net long position held by big speculators in US dollar index futures has risen by 0.9 thousand contracts

As a result, the average speculator trading US dollar index futures is overly optimistic about the US currency but the problem is that this huge optimism has only marginal impact on the greenback itself – since September 30, 2018 the US dollar has strengthened by a mere 0.7%. I am not surprised – if everybody is in one camp, most probably the opposite happens.

What is more, over that period the gold has strengthened as well (by 2.7%) so we have quite an interesting situation where the gold (red arrow) and the US dollar (green arrow) are going in the same direction:

Source: Stockcharts.com

It has to be also noted that the excessive optimism among the speculators trading US dollar index futures is accompanied by extreme pessimism among their fellows trading gold futures. As a result, there is an extremely positive mix of sentiment, supporting a bullish thesis on gold and the precious metals market. 

US Dollar - I Am Bearish

According to the COT data, since May 29, 2018 the big speculators betting on a stronger dollar have increased their bullish bets by 13.0 thousand contracts. Over that period the bears (big speculators betting on a weaker dollar) cut their bets by 21.4 thousand contracts. As a result, a net long position held by these traders went up by 34.4 thousand contracts but…the US dollar index has not changed at all (94.8 on May 29 compared to 94.7 on September 28):

source: Simple Digressions

What is the takeaway for speculators? Well, in my opinion, if something cannot go up pushed by hordes of optimists, it is supposed to go down. Summarizing – I am bearish on the US dollar in the medium term.

Copper Looks Promising

It looks like there is a good chance for better times for copper. Look at the chart below:

Source: Simple Digressions and the COT data

Note that now the so-called commercials, mostly copper producers, hold a net long position in copper futures (the red circle). Last time they held a similar position was October 2016 when copper prices were at the beginning of a vicious bull market (the green circle).

If I am correct, we may be ahead of another leg up in copper and this week’s white bullish candle (just forming) could be the first sign of it:

Source: Stockcharts.com

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US Dollar At A Pivotal Point

I am pretty sure that the gold bugs are totally depressed now. Since May 2018 gold and silver have been in their short-term downward trends and, despite extreme pessimism among North American speculators trading gold and silver futures, it looks like the precious metals market is doomed.

However, wait a moment and  look at this chart:

source: Stockcharts.com

Well, I hate classic technical analysis indicators as, for example, the MACD (Moving Average Convergence / Divergence) indicator (the lower panel of the chart) but sometimes these indicators work quite well (and, please, do not ask my why - I have no idea).  

In the case of MACD  - note that in the beginning of 2017 it delivered a SELL signal for the US dollar index (the red circle). Shortly after the US dollar started a long-term downward trend.

Interestingly, these days MACD is very close to generate a SELL signal once again (the blue circle). If that is the case, the precious metals market (very often going in the opposite direction to the US dollar) could start a new leg up that nobody expects. 

Summarizing - it looks like the US dollar is at its pivotal point now. From the technical point of view it should renew its upward trend very soon (probably this week). 

But if it does not, we may see a sudden and rapid deterioration and...a restart of an upward trend in precious metals.

Chart Of The Day - Trend Following In Action

Today just one chart illustrating how "Trend following approach" works:

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source: Stockcharts.com

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