Why Is the USDX Weak Lately and Gold Not Responding to It?

The PMs continued their relative underperformances on Aug. 11, as gold fell by 0.36%, silver by 1.89%, the GDX ETF by 1.88% and the GDXJ ETF by 2.15%. Moreover, since the drawdowns occurred alongside the USD Index’s 0.08% slide, the PMs’ inability to rally when the U.S. dollar is weak highlights their technical and fundamental fragility.

500 Narratives

With the S&P 500 in rally mode, short-covering morphed into momentum bids, which have now morphed into FOMO. Moreover, with the bulls brimming with confidence and inflation showing its first signs of slowing, investors are tripping over themselves to position for a dovish pivot.

Please see below:

Obraz zawierający tekstOpis wygenerowany automatycznieSource: CNBC

To that point, CNBC’s Jim Cramer said:

“Peak inflation is nirvana for stocks, especially for out-of-favor stocks, like fast-growing tech plays or the financials or the consumer discretionary names. That means you can buy everything from Microsoft to Wells Fargo to Target.”

He added:

“Some companies will absolutely be hurt by the upcoming recession, but others will see their stocks soar because they’re worth more in an environment where inflation is at last possibly under control,”

Thus, while ‘soaring stocks’ are not part of historical recessions, the narrative is another example of making it up as you go along.

Second, the algorithmic funds – which shift their positions based on realized volatility – have increased their stock holdings as the Cboe Volatility Index (VIX) declined. In addition, with FOMO seeping into the mindsets of hedge funds and long-only managers, you better get on board before you “miss even more.”

Please see below:

Obraz zawierający tekst, wewnątrz, zrzut ekranuOpis wygenerowany automatycznieSource: Bloomberg

Third, with investor sentiment doing a complete 180 from June, the chorus calling for 3,000 on the S&P 500 is now calling for new highs. For example, some believe that eclipsing 4,232 (which the S&P 500 did intraday on Aug. 11) signals the end of the bear market. CFRA Chief Investment Strategist Sam Stovall said:

“This remains a bear market rally until we close above the 4,232 level on the S&P. After that, history reminds us that no bear market ever recovered 50% of its decline only to set an even lower low. It would be an early signal that the bear is behind us.”

However, while investors cite erroneous reasons for why the S&P 500 is destined for new all-time highs, “history reminds us” that ‘never’ is also present from a fundamental perspective. 

To explain, I’ve noted on numerous occasions that reducing inflation to the Fed’s 2% annual target will require much more economic pain than the consensus realizes. I wrote on May 26:

If you analyze the chart below, you can see that the U.S. federal funds rate (FFR) (the green line) nearly always rises above the year-over-year (YoY) percentage change in the headline Consumer Price Index (the red line) to curb inflation. Therefore, investors are kidding themselves if they think the Fed is about to re-write history. 

Why Is the USDX Weak Lately and Gold Not Responding to It? - Image 3

To be specific, the FFR has either eclipsed the YoY headline CPI or come within ~50 basis points of its peak in every inflation battle since 1954. Therefore, please see the unprecedented gap on the right side of the chart. With the YoY headline CPI peaking (for now) at 9.1% and the FFR at 2.5% (the high end of the Fed's 2.25% to 2.5% range), the difference is 6.6%. 

As a result, history implies the FFR needs to hit at least 8.6% (which marks ~50 basis points below the current CPI peak). Moreover, while we don't expect the FFR to hit this level, the purpose is to show just how laughable a 3% FFR and 9%+ inflation is from a historical perspective. In reality, a 4.5%+ FFR is much more realistic, and the prospect is far from priced in. 

In addition, notice how every inflation spike leads to a higher FFR and then a recession (the gray bars). As such, do you really think this time is different? 

Thus, while the bulls unveil several narratives for why the S&P 500 is on the fast track to 5,000, the reality is that inflation is much more problematic than they realize. Also, if you celebrated every substantial inflation peak since 1954, you were left holding the bag when the recession hit soon after. 

On top of that, the Fed will double quantitative tightening (QT) to $95 billion per month in September. Therefore, if QE is bullish, what is QT?

Please see below:

Obraz zawierający tekstOpis wygenerowany automatycznieSource: U.S. Fed

As further evidence, none of the current cross-asset metrics signal a bear market low.

Please see below:

Why Is the USDX Weak Lately and Gold Not Responding to It? - Image 5

To explain, Morgan Stanley’s data is as of Jun. 30 (the dark blue bars), but the averages (the light blue bars) are the most important. As you can see, the average bear market doesn’t end with a P/E above 17, a CPI at 8%+, high yield spreads at 4.33% and an unemployment rate at 3.5%.

To that point, the U.S. unemployment rate hit a new 2022 low of 3.5% in July. However, the metric always bottoms before a recession. 

Please see below:

Why Is the USDX Weak Lately and Gold Not Responding to It? - Image 6

To explain, notice how the U.S. unemployment rate always troughs and then steadily rises before a recession hits. Thus, with the metric heading south in July, the bearish turn still awaits us. Of course, the uninformed crowd assumes that this time is different.

Furthermore, the unemployment rate needs to rise to curb inflation. The Atlanta Fed updated its Wage Growth Tracker on Aug. 11. Moreover, the overall index matched its record high set in June at 6.7%. However, job switchers – Americans that leave their job for a new one – saw their wages increase by 8.5% (a new all-time high and up from 7.9% in June). As a result, it highlights how companies are still paying up to attract new employees.

Please see below:

Why Is the USDX Weak Lately and Gold Not Responding to It? - Image 7

All in all, while the consensus and the media want you to believe that the bear market is over, their lack of fundamental objectivity highlights why narratives are so destructive. Remember, if normalizing inflation and reducing its balance sheet were so easy, the Fed would have done it already. 

Think about it: the Fed was so cautious about tapering its asset purchases that officials waited until inflation was so unanchored that it couldn’t be ignored. However, now that the Fed will hike interest rates to 3.4%, sell $95 billion in bonds per month and increase the U.S. unemployment rate to 3.7% (the Fed’s 2022 SEP projections), while the S&P 500 hits new highs? All the while, reducing the YoY headline CPI to 2%, even though it’s never been done since 1954 without the FFR coming within ~50 basis points of the cycle peak. Good luck.

What’s Wrong With the USD Index?

With the USD Index languishing recently, you may be concerned about the dollar basket's recent pullback. However, the short answer is: nothing is wrong with the greenback. For starters, the U.S. dollar always suffers when investors adopt a risk-on mentality; and with short squeezes lifting the most speculative assets, the fervor has spread to the currency market and uplifted the 2022 laggards. 

However, it's important to remember that the same unrealistic expectations that fuel the S&P 500's rise also fuel the USD Index's fall.

Please see below:

Why Is the USDX Weak Lately and Gold Not Responding to It? - Image 8

To explain, the dark blue bars above depict the market-implied changes in overnight policy rates for various currencies (regions) from now until mid-2023, while the light blue and red bars above depict the market-implied changes 12 months thereafter. 

If you analyze the USD column, you can see that “peak inflation” has investors pricing in 97 basis points of rate increases over the next 12 months and 107 basis points of rate cuts from mid-2023 to mid-2024. Therefore, the consensus expects the U.S. dollar to be a relative underperformer as other central banks play catch-up.

To that point, the EUR column shows that investors expect 118 basis points of rate increases over the next 12 months and 4 basis points of rate cuts from mid-2023 to mid-2024. Thus, expectations are bullish for the EUR/USD, which accounts for nearly 58% of the USD Index’s movement. 

However, investors’ rate hike/cut expectations are in la-la land. The idea that the ECB will out-hawk the Fed by hiking more and cutting less contrasts with fundamental reality. Furthermore, the Eurozone is in much worse economic shape than the U.S., and the EUR/USD should continue its descent when investors realize this.

The Bottom Line

Down is up, bad is good, and the narrative is that if you don’t board the bull train, it may leave the station. However, while the crowd is eager to ignore the fundamental imbalances that threaten the outlooks for the S&P 500, gold, silver, and mining stocks, it’s important to remember that gravity is undefeated. Therefore, while sentiment can keep asset prices uplifted in the short term, fundamental warning signs are flashing red.

In conclusion, the PMs declined on Aug. 11, and the GDXJ ETF was the worst performer. Moreover, while the USD Index has suffered recently, it’s likely only a correction within a medium-term uptrend. Furthermore, with investors expecting much more heavy lifting than the ECB can deliver, the EUR/USD’s recent rally is likely on borrowed time.

Overview of the Upcoming Part of the Decline

  1. It seems to me that the corrective upswing is either over or about to be over, and that the next big move lower is about to start.
  2. If we see a situation where miners slide in a meaningful and volatile way while silver doesn’t (it just declines moderately), I plan to – once again – switch from short positions in miners to short positions in silver. At this time, it’s too early to say at what price levels this could take place and if we get this kind of opportunity at all – perhaps with gold prices close to $1,600.
  3. I plan to exit all remaining short positions once gold shows substantial strength relative to the USD Index while the latter is still rallying. This may be the case with gold prices close to $1,400. I expect silver to fall the hardest in the final part of the move. This moment (when gold performs very strongly against the rallying USD and miners are strong relative to gold after its substantial decline) is likely to be the best entry point for long-term investments, in my view. This can also happen with gold close to $1,400, but at the moment it’s too early to say with certainty.
  4. The above is based on the information available today, and it might change in the following days/weeks.

You will find my general overview of the outlook for gold on the chart below:

Why Is the USDX Weak Lately and Gold Not Responding to It? - Image 9

Please note that the above timing details are relatively broad and “for general overview only” – so that you know more or less what I think and how volatile I think the moves are likely to be – on an approximate basis. These time targets are not binding nor clear enough for me to think that they should be used for purchasing options, warrants, or similar instruments.


Summing up, it seems that the corrective upswing is over (or close to being over), which means that the powerful medium-term downtrend can now resume.

Last week, we closed yet another profitable trade in a row. This year’s profits are already enormous, but it seems likely to me that they will grow even more in the following weeks and months. Making money on corrections during powerful trends is a difficult feat, but you managed to do just that – congratulations!

On an administrative note, I will be traveling next week, and therefore, Gold & Silver Trading Alerts posted during next week will not include the regular technical analysis – they will focus on the fundamental aspects instead. The next regular technical analysis will be posted on Monday, Aug. 15. I will keep you informed if anything major changes (which is unlikely).

Moreover, please note that it’s not only the profits on the long positions that are so great about this success – it’s also the ability to get back on the short side of the market at more favorable (higher) prices, thus increasing the likely profits from the current trade. Congratulations, once again!

Also, please note that I will be updating the targets for the leveraged ETFs as we move closer to them, as their prices will depend on the path prices take to reach their targets.

After the final sell-off (that takes gold to about $1,350-$1,500), I expect the precious metals to rally significantly. The final part of the decline might take as little as 1-5 weeks, so it's important to stay alert to any changes.

As always, we'll keep you  our subscribers  informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full speculative short positions (300% of the full position) in junior mining stocks are justified from the risk to reward point of view with the following binding exit profit-take price levels:

Mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $20.32; stop-loss: none (the volatility is too big to justify a stop-loss order in case of this particular trade)

Alternatively, if one seeks leverage, we’re providing the binding profit-take levels for the JDST (2x leveraged). The binding profit-take level for the JDST: $29.87; stop-loss for the JDST: none (the volatility is too big to justify a SL order in case of this particular trade).

For-your-information targets (our opinion; we continue to think that mining stocks are the preferred way of taking advantage of the upcoming price move, but if for whatever reason one wants / has to use silver or gold for this trade, we are providing the details anyway.):

Silver futures downside profit-take exit price: $12.32

SLV profit-take exit price: $11.32

ZSL profit-take exit price: $79.87

Gold futures downside profit-take exit price: $1,504

HGD.TO – alternative (Canadian) 2x inverse leveraged gold stocks ETF – the upside profit-take exit price: $19.87

HZD.TO – alternative (Canadian) 2x inverse leveraged silver ETF – the upside profit-take exit price: $49.87

Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash)

Insurance capital (core part of the portfolio; our opinion): Full position

Whether you’ve already subscribed or not, we encourage you to find out how to make the most of our alerts and read our replies to the most common alert-and-gold-trading-related-questions.

Please note that we describe the situation for the day that the alert is posted in the trading section. In other words, if we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices to decide whether keeping a position on a given day is in tune with your approach (some moves are too small for medium-term traders, and some might appear too big for day-traders).

Additionally, you might want to read why our stop-loss orders are usually relatively far from the current price.

Please note that a full position doesn't mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.

As a reminder - "initial target price" means exactly that - an "initial" one. It's not a price level at which we suggest closing positions. If this becomes the case (as it did in the previous trade), we will refer to these levels as levels of exit orders (exactly as we've done previously). Stop-loss levels, however, are naturally not "initial", but something that, in our opinion, might be entered as an order.

Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks - the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGL, GLL, AGQ, ZSL, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as "final". This means that if a stop-loss or a target level is reached for any of the "additional instruments" (GLL for instance), but not for the "main instrument" (gold in this case), we will view positions in both gold and GLL as still open and the stop-loss for GLL would have to be moved lower. On the other hand, if gold moves to a stop-loss level but GLL doesn't, then we will view both positions (in gold and GLL) as closed. In other words, since it's not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can't provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the signs pointing to closing a given position or keeping it open. We might adjust the levels in the "additional instruments" without adjusting the levels in the "main instruments", which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels daily for the most popular ETFs, ETNs and individual mining stocks.

Our preferred ways to invest in and to trade gold along with the reasoning can be found in the how to buy gold section. Furthermore, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.

As a reminder, Gold & Silver Trading Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.

Thank you.

Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief