Dollar Strength Continues to Pressure the Metals
Gold futures prices were down around 5% on Thursday afternoon, leading a nearly across-the-board rout in most precious and industrial metals. Platinum took the brunt of the selling pressure, falling 8%, while silver was down 7%.
Per our previous discussion, the strengthening dollar was the primary culprit behind the metal market weakness. The U.S. dollar index (USD) rose nearly 1% and is up nearly 3% since bottoming in late May at the pivotal 89.50 level. From a currency perspective, that’s a sizable rally in a short period of time, and it’s having a major impact on all commodities which are priced in dollars—particularly metals.
From a technical standpoint, the dollar index rally has pushed decisively above its widely watched 50-day moving average. This has psychological significance due to the fact that many hedge funds and institutional investors attach significance to the 50-day line. This means there was likely additional selling pressure caused by the dollar’s move above this trend line. Further, there may be additional damage to come in the near term before the dollar rally fizzles out.
Boosting the dollar was the latest pronouncement by Federal Reserve members, who said at least a two-quarter point increase in the benchmark Fed funds interest rate is likely by 2023. The Fed’s statement was enough to strengthen the dollar, while undermining gold’s attraction to overseas investors holding foreign currencies.
As long as the dollar index is rising, gold, silver and the major industrial metals will be under some degree of selling pressure. However, it’s worth noting that the 10-year Treasury Yield Index (TNX) was down over 4% on Thursday, effectively erasing its rally from the prior day. That’s a potentially positive sign for gold (beyond the immediate term) since it means that gold likely won’t have to worry about competing with rising yields for a while.
The hit gold took today activated our protective stop losses for several of our trading positions, including the gold and silver ETFs. Accordingly, I’m recommending that we continue building our cash holdings as we await the next confirmed bottom in gold and the other major metals. I don’t expect the selling wave to be prolonged, and the metals will soon become technically “oversold” (and thus vulnerable to short covering).
Moreover, the fundamentals supporting strong global industrial demand for the base metals like copper, steel and aluminum are still in place. Sooner or later, the fundamental backdrop will come back into the foreground once the dust has settled from the market’s reaction to the strengthening dollar. But for now, a defensive posture is warranted as dollar strength currently prevails.
Gold mining stocks continue to be impacted by not only the strong dollar and weaker bullion prices, but also by a weakening internal momentum profile. In Tuesday’s trading alert I mentioned that my favorite technical indicator for the gold stocks, the 4-week momentum of the new highs and lows for the most actively traded U.S. and Canadian miners, was accelerating lower.
This is significant since the new highs and lows reflect the incremental demand for mining equities, and a sharply declining trend in this indicator suggests the near-term path of least resistance for gold stocks in the aggregate is down. As you can see in the following chart, this indicator continues to deteriorate, telling us to avoid initiating new long positions in the mining stocks for now.
Once the gold mining stocks start showing signs of bottoming out, we’ll turn our attention to the stocks which have shown the greatest amount of relative strength during the decline. The ones that outperformed during the broad market correction are likely to be the biggest winners in the market’s next rising trend.
What to Do Now
We were stopped out of our trading position in the iShares Gold Trust (IAU) on June 16 after our stop loss slightly under 35 was violated on a closing basis. Our stop loss at the 24.50 level in the iShares Silver Trust (SLV) was also violated today, stopping us out of our position. Finally, our long position in Newmont Mining (NEM) was stopped out at the 67.50 level (our original entry point) on June 17 after a decisive violation of this level. No new trading positions in any of these funds/stocks are recommended until our indicators tell us the danger of additional selling pressure has ended. I’ll have more to say about the gold stocks as a group in the next issue of the report.