It was only a few months ago that the world witnessed an event in the Middle East that can only be classified as a “watershed event.” For the first time since Chevron first discovered oil in the Dhahran, Saudi Arabia, a world leader not belonging to the U.S.-dominated NATO alliance, was greeted with all of the pomp and circumstance usually reserved for the United States.
When Chinese President Xi Jinping stepped off the aircraft back in December, he was greeted with such respect by Saudi leader Mohammed bin Salman that the international media made great fanfare out of it while the U.S. MSM downplayed it as if it were an inconsequential state visit.
As we move into the New Year, one of the forecasts about which I am constantly reading is the imminent arrival of the “New World Order” in which the World Economic Forum (“WEF”) led by Klaus Schwab rearranges global priorities by way of seismic changes in politics, economics, and medicine.
The spin doctors conger up images of Dr. Evil-type characters holed up in a luxurious retreat in the Swiss Alps, hovering over a map of the world as they divide up the regions like Monopoly pieces. Unfortunately, there actually is a shift occurring in the way the world works, but it lacks the theatrics of an Ian Fleming novel or a movie by James Cameron. The shift that is occurring at Hemingway-esque speed (first slowly, then suddenly in reference to his bankruptcy) is the demise of the not-so-mighty U.S. dollar.
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From a technical perspective, the dollar index is comprised of a basket of currencies (more appropriately referred to as a “basket-case of currencies” like the energy-starved Yen and Euro), but it generally represents the major influence on the commodity prices or as the CPI-watchers like to say “input prices.” I am focused on this because the greenback’s raging ascent, which began in the summer of 2021, put in a major top in late September of last year on the exact day that I marked the turn, which was when the Bank of England did a ferocious one-eighty and instead of selling 10-year gilts to reduce the balance sheet, they were forced to buy gilts in order to rescue their insolvent pension funds.
Since then, two uptrend lines have been vanquished at around 109 and 103, with the first of the greatly-revered “death crosses” occurring last December at around 108 and the second this week around 106. The “death cross” occurs when the one moving average crosses below the second. In this case, the 50-DMA crossed below the 100-DMA in December, with the 50-DMA crossing below the 200-DMA this week.
Historically, these are very powerful signals that speak to the longer-term trend of markets, and the reason I am focused on the dollar is that its behavior can be a predictive tool for monetary and foreign policies.
2022 was a year in which the U.S. financial press was preoccupied with inflation, and it was the CPI bogeyman that hit 9% in the third quarter that was on the minds and lips of all of the Fed governors led by numero uno inflationista Jerome Powell. In order to eliminate the embedding of the dreaded “inflationary psychology,” Powell allowed the Fed Funds rate to advance more in nine months than had ever been experienced in all the years of Federal Reserve Board’s “management” of monetary policy.
What troubles me greatly as we head into 2023 is that the inflation rate in the United States (and Canada) skyrocketed during a period in which the American currency experienced the biggest rise since 1980 and 1994. The past sixteen years have seen the USD move from the low 70’s to the recent 114-plus level allowing the strength of the dollar to negate the effect of rising input prices.
From the summer of 2021 and all through 2022, as CPI began to soar, the strong dollar should have had a moderating impact on input prices, but due to supply chain shocks and fiscal handouts in the form of “stimmy cheques,” input prices were not dulled by the strong dollar.
When I see the chart of the dollar index and ponder the ramifications of its effect upon input prices within an extended period of weakness, I have to wonder how on earth the Fed is going to launch into “pivot” mode during a period of dollar weakness. One also has to wonder how the dollar can be retreating given the typically bullish effect of rising yields on the domestic currency.
The answer lies in the ability of markets to discount future events and what I think the dollar weakness is telling us is that the American economy may no longer be the aphrodisiac for global investment flows. It may just be that the debt monster plaguing the world’s largest deadbeat nation may be the proverbial chickens coming home to roost. Foreign investors typically favor the U.S. dollar during periods when they get a preferential return on their principal; what if the new focus has morphed into a concern of the return OF their principal? Solvency is never a concern until it is one, and with the US$32 trillion debt load, there is going to be a need to refinance that debt at rates far higher than a year ago.
I turned positive on stocks in late September with the Bank of England now forever in my servitude as their move to save their pension funds set the theme for the balance of 2022. I wrote back in December that I was not going to call the October 13th low for the S&P at 3,491.58 as “THE” low until I watched the late December-early January tape action. Now that the Santa Claus Rally and the First Five Days indicators registered positive outcomes, I am confident that the October low was indeed the low for the bear market and that we could see an extended rally into at least the second quarter.
However, there is an indicator called the “December low indicator” that says that if the market takes out its prior December low in the first quarter of the year, then all “BUY” signals are negated, and new lows are on the horizon. The levels that I will use as a stop-loss range is between 3,783 and 3,764 (closing low and intraday low for December).
The first week of trading allowed gold to break out of an oppressive band of resistance between US$1,825 and US$1,875 after which it touched US$1,912 before succumbing to profit-taking.
Also, the relative strength indicator just poked its head above 70 and now resides in overbought territory. That does not mean gold should be sold because it can stay overbought for weeks before reversing. It does mean that one should defer new purchases until the overbought conditions get worked off.
Now, despite the elevated RSI reading, the 50-DMA is about to surpass the 200-DMA, constituting a “Golden Cross” (the opposite of the “Death Cross”), and that could serve as an offset to the RSI reading. If gold can get comfortably above the US$1,900 level and stay there, we will get the cross next week, which is a powerful longer-term signal for the gold market. The next major resistance for the spot is around US$2,000, and then the all-time highs of around US$2,087.
The only problem I have right now with the entire precious metals complex is that this week, unlike the period of September 27th until New Year’s, silver is underperforming gold, which is a big non-confirmation and a near-term negative. Silver usually acts as an early warning device, and when it starts to lag gold, a near-term top usually arrives for the entire complex.
There was a bearish MACD crossover (“sell signal”) just before Christmas, and since then, silver has been in a range between US$23.25 and US$24.75, with resistance sitting in the US$26.00-26.50 range. I think it resolves to the upside in Q1/2023, but it may need a retest back to the 50-DMA around US$22.70 first.
Top-rated Getchell Gold Corp. (GTCH:CSE; GGLDF:OTCQB) reported more positive drill results from Fondaway Canyon, where they have recently upgraded their resource estimate to 2,059,900 ounces of in-ground gold with all zones open along strike and to depth. I get bombarded with emails asking why the stock price continues to languish, and while it is terribly frustrating, it is perfectly understandable.