On the topic of future inflationary or deflationary expectations, there are strong fundamental arguments on both sides. In my simple interpretation, the deflationary camp (dollar bulls) make the case that the economy remains fractured, entire industries are being undermined by the pandemic, there is high unemployment, the personal savings rate is up, the stock market is at stretched valuations, the housing market is approaching bubble territory, and the demand for US dollars remains the prevailing undercurrent of international trade. The Fed, despite its best efforts, cannot seem to meet its inflation target. Further economic weakness or perhaps a market crash would incite a flight to liquidity, demand for dollars to meet debt obligations, and broad debt defaults, further tightening the monetary supply. A strong dollar generally weighs heavily on the price of precious metals, particularly in short-term liquidity crises, and creates the potential for a near term headwind on metals prices.
The inflationary camp argues that the Fed – and policymakers – have shown their willingness to do “whatever it takes” to prop up the markets and inject unfathomable amounts of liquidity into the system. There is seemingly no limit to the tools available for this purpose, as we have seen direct stimulus injections into personal bank accounts, Federal programs such as PPP, and other fiscal interventions. In theory, a $1,200 stimulus check could be a $12,000 stimulus check or a $120,000 stimulus check. The government can continue to print, and can even choose to monetize the national debt.
As a technical analyst, these theories are beyond my capability to fully comprehend in whole or predict with any accuracy. I simply look at the charts to determine primary, secondary, and tertiary trends, and what those trends communicate about the environment now. My job is to react to what the market. On that point alone, this is what I see.
The dollar is trending down
The primary, multi-decade trend in the dollar remains down. From 2008-2017 the dollar produced a powerful countertrend move that culminated in its third multi-decade lower high. This countertrend move broke down in March, has since pulled back to retest the breakdown, and appears poised for another leg down. The topping pattern formed from 2015-2020 appears to be a diamond reversal pattern. The primary downtrend would be violated only if price moved above falling resistance represented as the upper bound of the falling channel. So, in brief, the long term trend is down, the bullish, decade-long countertrend appears to be over, and it would appear that further weakness is ahead.
Gold is trending up
Conversely, gold is trending up. The countertrend bullish move in the dollar coincided with a countertrend bearish move in gold, which created a 7-year base (continuation pattern) that broke out to all-time highs this year. Gold remains in a 20 year uptrend, and the breakout to new all-time highs suggests that the primary trend is resuming its upward thrust.
The stock market is trending up
The S&P500 also remains up. While a crash may be in the offing at some point in the future, the 12-year trend remains up, and even the historic Covid selloff in March was notably just a back test of the two-year price shelf from 2015-2017.
The S&P500 priced in gold is trending down
Gold outperformance relative to equities remains noteworthy. The primary, 20+ year trend remains down. During the period from 2011-2018 when gold was basing, the S&P500 outperformed gold, but this entire moved appears to be a countertrend 38.2% Fibonacci retracement, which broke down in 2019 and now appears to be resuming the downward trajectory of the primary trend. This trend suggest further gold outperformance even if the nominal price of each rises in tandem with a weakening dollar.
The same chart with only the 50 week moving average and 200-week moving average shows only three crosses over the past 20 years. These crosses are infrequent, and the 50 week MA falling through the 200-week MA in March would seem to confirm the expectation of further downside pressure in this ratio.
As always, I would love to know your feedback.