With the FOMC set to hibernate until March, it is left to fend for itself amid hawkish (or at least not yet easing) echoes of Jerome Powell’s assertion that the market should not expect rate cuts next year. Well, we already know that, sir.
The only advantage that will remain, assuming that the “not yet accommodating” policy does not become hardline again, is the potential for the opposing party to outbid.
This has turned into bold bidding by risk-averse gamblers who suddenly rush to a safe haven. It is definitely the US dollar, which is very similar. The difference is that the US dollar remains a safe haven as long as public confidence in debt securities remains. As for gold, it is considered a safe haven with “value” in the long term.
As a hedging instrument and with the confidence of the collective that assumes the validity of this instrument, the US dollar, by virtue of its status as a global reserve, receives an inward (algebraic) “investment” when the herds escape the blow of assets, which have been prepared to counter the US dollar over decades of US and inflationary monetary policy. Globalism.
However, here we find a recent disconnect between stocks (and global stocks, excluding US stocks) and the US dollar reversal. Either the US dollar will fall (a reversal rise in line with stocks) or we may have the beginning of something significant in the form of a fundamental change in the nature of the overall markets.
This could mean a market rotation, a bear market for stocks (the SPX finally joined the “new all-time highs!” eventual favorite for an emotion-fueled top) or if the US dollar continues to rebound (the opposite (to the downside) trend continues) Even a slippery slope towards market liquidation (noting all that “soft landing” and “no landing” consensus that exists in the mainstream financial media about the potential adverse setup).
The gold/silver ratio (GSR) remains constructively stable to push the US dollar higher, after all. If gold rises impulsively against silver, inflation trades will be “paused” and we could observe market liquidation trades “activating.”
It is less monetary, more speculative, and more sensitive to cycle/inflation than gold. If the GSI breaks down from this constructive position, inflation trades will benefit.
Gold/Silver Ratio – Daily Chart
From now on, let’s take a quick look at the technical situation of the counter market, represented by (). Much like the September-November rally trap that seemed to take forever and a day to resolve, today’s encounter with the resistance line is a small ongoing affair.
Loud, noisy sound and incitement to take out resistance at 103.50. As I advised subscribers several weeks ago, the key level to break and hold (for the USD to go higher) is the December high of 104.27. But the first US dollar is seeing noise in the resistance area and the important 200-day simple moving average.
The weekly chart provides a view that there is a level of caution for inflation traders shown by the fact that the index held higher to the bottom of a ‘bear trap’ as it began to rebound from clear long-term support.
The bottom line
If the US Dollar Index fails to make a higher rally to the December high and instead falls (and silver leads gold higher), the broad rally could continue, especially in more traditional “inflation trades” such as commodities and stocks that produce commodities/resources, and resource-rich regions within emerging markets.
If the US Dollar Index can clear and hold above the December high, and the gold/silver ratio follows its current constructive pattern upward, you may want to do a thorough examination of the investment pool. There might be a trap!
To add a third dynamic, there was a blessed phase from 2001 to 2004 when the gold/silver ratio rose (unprecipitously), the US dollar fell, and the gold mining sector had an essentially pure macro backdrop in the previous years and for 20 years now. After that, commodity and stock markets also rose and gold miners entered a bubble amid deteriorating fundamentals. But even a stage of two to three years will be very profitable.
2024-02-02 13:38:00
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