US Dollar Chokes Gold, Silver and Oil Movement

Gold, silver and oil haven’t gone anywhere in 2018. Why?

The chart below plots gold, silver and crude oil against the US Dollar Index.

The US dollar has been in a tight trading range for most of 2018. Although asset correlations come and go, commodities are traded in US dollars, and the US dollar inactivity likely contributed to the lack of direction in the commodities market.

I assume a dollar breakout will awaken commodities.

The November 29 US dollar update featured the chart below, which projects a more significant low in early 2018.

The US dollar is right in the down side target range, but the process of carving out a low is taking longer than projected. We are still looking for a significant dollar bottom (perhaps after one more new low).

If the correlation between US dollar (strong dollar = weak commodities) persists, the US dollar should soon begin to put pressure on commodity prices.

The first chart highlights some basic support/resistance levels and patterns to watch:

Gold:

Potential triangle with resistance at 1,365 (Fibonacci resistance at 1,382). Support around 1,310.

Silver:

Two potential triangles. A break of the shorter-term triangle should lead to a test of the longer-term triangle boundaries.

Crude Oil:

The January high could be a significant top. The short-term triangle (if it breaks higher) could cause a re-test of the January top and an excellent opportunity to short crude oil via the United States Oil Fund (USO). A break below triangle support may have 55 (long-term trend channel support) as next target.

We will look at technicals, seasonality and sentiment to assess the direction and scope of the next move. Continuous updates will be available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, and 24.52% in 2015.

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Diversification: The Correlation Risk Trap is Real

A rising tide lifts all boats and liquidity buoys all asset classes. That’s great, but it’s not diversification. In fact, it presents a whole new type of hidden risk. Many ‘diversified’ portfolios today would fail miserably at any sort of Black Swan event.

The purpose of diversification is to reduce risk. The rationale behind diversification used to be that booming cycles of some asset classes offset the bust cycle of other assets.

Diversification made sense in an environment where some asset classes boomed while others got busted, but that isn’t the case anymore.

Today most asset classes ebb and flow at the same time, but at different degrees. This makes diversification less effective and possibly dangerous.

The first chart shows the percentage change of the following asset classes/ETFs since January 2007: S&P 500 SPDR (SPY), iShares Core Total US Bond ETF (AGG), iShares Dow Jones US Real Estate ETF (IYR), and iShares S&P GSCI Commodity ETF (GSG).

In early 2007 stocks and commodities cushioned the decline in real estate prices. In 2008 commodities lessened the sting of falling stock and real estate prices.

Then came quantitative easing and it’s become clear ever since that all asset classes swim in the same liquidity pool. Some swim faster, some slower, but all float with the tide.

Different Approach to Diversification

A less popular, more contrarian and quite possibly more effective approach to diversification involves simple under appreciated cash.

Based on Rydex funds flow data, investors are despising cash like never before. Low interest rates are partially to blame for the great cash exodus, but excessive enthusiasm for stocks is probably the main motivation.

The second chart illustrates basic support (green) and resistance (red) ranges for the S&P 500. The S&P tends to get overbought in the red and oversold in the green zone.

Over the past years, investors did well to diversify out of stocks (and other assets) into cash when prices reached the red resistance range and rotate out of cash into stocks (and other assets) in the green range.

The S&P is about to reach overbought territory and risk is rising. Raising cash may offer more risk protection than diversification.

The Profit Radar Report will provide specific trigger levels indicative of a trend change from up to down.