The US Dollar Index is breaking higher. It was trading at 96.41 Thursday but settled the day at 90.51.
A daily close above 96.61 would mark a new 52-week high, putting the dollar in position to eventually retest its bull-market high at 104.
If this strength continues, then the relief rally in precious metals could be over.
Why Bullish For Gold?
First, we know that a real bull market is not going to begin until the Fed ends its rate hikes. A stronger US dollar can act as a form of rate hikes.
Foreign markets are already in bear territory and the global economy (ex US) could be dangerously close to a recession.
A rising US dollar can exacerbate the issues with foreign US-denominated debt. Ultimately these problems can also hit the US, where in 2017, 44% of sales (from S&P 500 companies) came from outside the US.
Is the Fed going to continue hiking if the US dollar continues to surge?
The obvious answer is that major peaks in the US dollar tend to coincide with important bottoms in gold and precious metals investments. This occurred in 1985 and 2001.
Weekly Gold (top), USD
Note that January 2017 did not mark a major peak for the US dollar.
Precious metals actually peaked in 2016. And following the 1985 and 2001 peaks, precious metals trended higher and made higher highs in steady fashion.
Ultimately, precious metals are not going to begin a sustained, multi-year bull market until the Fed stops hiking. That will likely be followed by a major peak in the US dollar.
The stronger the US dollar gets and the higher it goes, the closer the Fed will be to ending its hikes and the closer the US dollar will be to a major peak.
Watch For Gold’s Bottom
It’s important to note that gold often bottoms several months before the US dollar peaks. There are some who believe the two could rise together for a while.
The precursor to such a scenario would not change. It requires a rising US dollar and the Fed ending its hikes.
The real question is at what point during the US dollar’s rise do conditions turn bullish for precious metals? We’ll get to that in the future.
From here, a rising US dollar will be negative for precious metals initially as the Fed will be able to hike in December and perhaps at least once more. But from a bird’s eye view, it will accelerate the time between now and the start of a bull market.