There are a couple of stories we’re watching today. The first is the dollar, which last Friday popped up above all its moving averages, reinvigorating the bulls and slaughtering any notion that the dollar’s ascent is done with.
We’ll have a chart of the dollar for you in a moment, but first let’s outline our second big story of the day, silver.
We believe silver is now putting the lie to any notion that a return to the precious metals bull is underway. That move came to a screeching halt, you remember, exactly five years ago in April of 2011, signaling to all who would listen that the whole complex was about to turn over and give way to the bear.
It took gold and the miners a few more months to top out back then, but being the good soldiers they are, it was only a matter of time (and not a question of fealty) before they swung into line.
Since then, the action has been ever lower, with slight pauses to give the geldophiles hope that their tender metal still loved them and would eventually behave as they desired.
Silver Leads the Way
Below is the iShares Silver Trust ETF (NYSE:SLV) for the last half year. We say she leads the PMs.
Note particularly how the break below $14 places her under all her moving averages (red circle), three of which are also declining. It’s action like this that tells us that the latest pop higher was nothing more than a piper’s fancy and portends further declines for the near term.
Have a look –
We would also suggest that RSI’s breaking below her midway waterline is an ominous sign that will become a full bore technical selling signal once MACD falls below hers, action that’s likely less than a week away should SLV continue to show weakness. MACD has already crossed lower (black boxes).
The tide appears to have turned.
Silver is Money is Silver…
Much of the weakness we see in SLV, and that’s mirrored to a lesser degree in the charts of the Market Vectors Gold Miners ETF (NYSE:GDX) and the SPDR Gold Trust (NYSE:GLD), is a function of the aforementioned strength in the buck. Silver, after all, when not being used by dentists and electricians, was once a rather popular store of value – ‘money’, as we call it today – functioning nearly universally in that role.
So it shouldn’t surprise us to see the dollar moving opposite silver and gold, as it regularly does. Because aside from the fact that precious metals are priced in dollars, it also stands to reason that when silver is money, the dollar can’t be, and when the dollar is, silver cannot.
As the chart below shows, the dollar’s three week hiccup that began at the beginning of February now appears to be over. The Dollar Index (DXY) last Friday popped above its moving averages for the first time in a month – a perfect mirror-image of the action in SLV – reasserting itself as the world’s master monetary monarch.
Have a look –
Here, too, the action from the RSI and MACD indicators is instructive. The former has now surfaced above its midway waterline, pulling MACD in tow, and should confirm RSI’s bullish action by week’s end.
With all the moving averages now bested, we expect DXY to test the 100 level in the next 60 days, perhaps coterminous with silver’s dump to new bear market lows.
At that point, there will be little reason for investors the world over to avoid purchasing American assets. With the added kicker of a strengthening dollar, the stock market and perhaps real estate, too, should see some punchy gains.
Trade for the Week
We’re going to step out on a limb here and add to our already numerous proclamations on the precious metals. But before we do, have a look at the following chart.
This is data generated by the Commodities Futures Trading Commission (CFTC) for the last decade. It shows Hedge Fund positioning in gold over that period and, more to the point, the latest, extreme bearish positioning in the metal.
Here it is –
According to the records we reviewed, the gold position of the hedgies heading into 2016 was at its most bearish ever.
Moreover, with more than 27,000 contracts net short outstanding, it stood to reason that a stall in the decline of the metal would trigger some heavy short covering. And indeed, the move higher in the price of gold at the beginning of February offers every indication of a short covering blitz of Sudeten proportions.
A twenty percent move in 60 days that gapped higher four times over that time frame is nothing if not a short covering frenzy.
But what’s equally intriguing to us is the current hedge fund positioning in gold.
After being massively short on the metal coming into the January/February rise, the speculative money has now veered full bore in the opposite direction.
The chart shows just how fast this money is travelling in and out of the precious metals market, and is now approaching an overall long position last seen in October, directly before the bottom fell out on gold!
Will it happen again?
Are we looking at an imminent turnaround in the fortunes of the golden girl?
We think so. And we believe the best way to play it is with the same two agents we opened with above, silver and the dollar.
We say a long PUT on SLV and a short PUT on the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP) should produce generous profits within six to eight weeks.
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Wall Street Elite recommends you buy the SLV June 14 PUT for $0.77 and sell the UUP June 26 PUT for $0.78. Your credit is a penny on every pair traded.
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With kind regards,
Hugh L. O’Haynew