Categories: General Market Commentary / Precious Metals
Topics: General Market Commentary / General Precious Metals

Dollar Euphoria and Gold

Dollar Euphoria and Gold

by Adam Hamilton

 

The US dollar has rocketed higher since early November's US presidential election, rivaling the massive gains seen in the stock markets. With the world's reserve currency catapulted to extreme secular highs, dollar euphoria has naturally exploded. Traders are overwhelmingly betting the dollar's strong upside will continue. But this greed-drenched currency looks very toppy and ready to fall, which is very bullish for gold.

The US dollar's recent stampede higher has been amazing, as evidenced by the venerable US Dollar Index. Launched way back in 1973, the USDX is the dominant and most-popular market gauge of how the US dollar is faring. Since Election Day 2016 alone, the USDX has soared 5.1% higher in merely six weeks! That isn't much behind the flagship S&P 500 broad-market stock index's 5.9% post-election rally.

But the post-election USDX surge is still far more extreme. The world's handful of reserve currencies are decisively commanded by the US dollar. Because of the vast amounts of dollars flooding the globe, it has great inertia. Thus like an oil supertanker, the dollar's moves tend to be gradual and unfold over a long time. The USDX usually moves with all the sound and fury of a tortoise, leisurely meandering around.

The dollar's normal lack of volatility helps explain why leverage on currency trading can be so epic, over 100x in some cases! To translate USDX moves into stock-market equivalents, they probably need to be multiplied by at least 3x or so. The dollar's post-election surge is every bit as extreme as a 15%+ rally in the S&P 500 over six weeks would be! Such a colossal move has major implications for many markets.

Trump's surprise victory unleashed staggering US-dollar buying on Fed-rate-hike expectations. Like all traders, the currency guys assume Trump's proposed slashing of tax rates and regulations will help fuel a much-stronger US economy. That not only gives the Fed cover to hike rates faster, but could spark surging inflation that forces the Fed's hand on rate normalization. It all boils down to Fed hawkishness.

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