Can Gold Defeat the Big, Bad Dollar?

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With just a little more than nine trading weeks under our belt in 2023, gold is already becoming one of the most frustrating plays on the market.

It’s an impressive feat. After all, there’s no shortage of clunky, broken trades in this market. Nearly two years of bear market action has effectively stripped investors of their conviction. We’re now watching key battles break out at pivot points across several major sectors.

Here are just a few of the gut-wrenching moves tormenting us so far this year:

Many beaten-down growth stocks streaked higher in January, only to reverse lower in February. Energy stocks failed to break above their November highs and reversed lower, yet are now bouncing at the bottom end of a wide, sideways range. Crypto also can’t get its act together. Most of the cryptosphere has abruptly stalled and reversed after Bitcoin failed to post a clean breakout at $25K…

But gold is the most discouraging asset of them all as bulls and bears battle for control following another sloppy, trendless month.

Earlier this year, I detailed how gold has been building for a significant change in trend since 2019. That’s when the shiny yellow rock began to rally off its bear cycle lows, breaking out of a choppy base years in the making. The base breakout also helped trigger a wild rally into the early days of Covid – along with another test of the elusive $2,000 level.

You already know what happened next. The move didn’t stick, and gold was banished to a wide, choppy range lasting the better part of the past three years.

Spoiler alert: Gold’s still trapped! The promising rally off the October lows hit the wall once the calendar flipped to February. This time around, gold hit the wall at $1,975, then dropped four straight weeks.

Remember, gold topped out just above $1,900 during the prior cycle in 2011. The two brief runs above $2,000 in 2020 and 2022 also led to sharp reversals. Gold has never posted a monthly close above $2,000. Despite a valiant effort to kick off 2023, the January rally couldn’t get it done. That momentum is now gone, and we’re left to pick up the pieces – and figure out what might unfold next.

The Dollar Problem

First, it’s important to understand what went wrong with the gold rally.

Here’s a hint: it begins and ends with the US Dollar. 

The strength of the buck has been a thorn in the side of risk assets since the bear market picked up steam in late 2021 – early 2022. The dollar has an inverse relationship with stocks and commodities. Dollar up, stocks and commodities down. Simple!

That’s exactly what we witnessed in 2022. The dollar (and rates) rallied, while stocks and other risk assets slumped.

But the dollar index topped out in October following an incredible rally. The uptrend was clearly exhausted – and it began to break down in November. Naturally, this is also where precious metals caught a bid. Dollar down, gold up!

February was the next big turning point. After cratering for three months, the dollar caught a bid and zoomed higher. The move stalled the gold and silver rally and slammed the miners. Unfortunately, this was just the beginning of a month of pain for the gold bulls. As the dollar rally picked up steam, precious metals tanked. By the end of the month, gold had coughed up its year-to-date gains. Meanwhile, silver dropped all the way back to its October swing highs.

These moves are the definition of a hard reset. Now, the dollar and precious metals are approaching critical levels.

Here’s the US Dollar Index:

The February rally has lifted the dollar index back to 105, an important pivot going all the way back to last summer. This is the same level where the buck failed in December. It’s also where that short relief rally turned south in early January.

What happens next is critical for gold (and stocks, for that matter). If the dollar index can’t break above 105 and turns lower, there’s little doubt we’ll see a rally in precious metals. We can also assume this would be a significant rally with some staying power, since a rejection at 105 would probably lead to the continuation of the dollar’s downtrend – and a retest of those February lows.

Planning for a Gold Bounce

The dollar index is slowly slipping lower toward 104 as of this writing. There’s no guarantee that this fade will continue, but every move has to begin somewhere. We need to watch closely this week for a decisive reaction.

If we do see significant slippage in the buck, the next leg of the gold rally should attract some fresh eyeballs. I initially thought the January rally in precious metals could be the first wave of a new secular bull run. Perhaps the February hard reset is just a bump in the road – and fresh momentum will carry gold and silver plays higher into the end of Q1.

Our playbook from earlier this year still applies if we do see a strong bounce. I suspect many investors still are not prepared to ride a gold breakout. Remember, index funds offer essentially zero exposure to precious metals. If you want to profit from a move, you have to actively seek out these gold plays.

Mining stocks started to perk up last week at do-or-die levels. But they have work to do. I’ll be watching GDX and some individual names for any clues that momentum is returning to the sector.

Let me know what you thought of today’s article… and if you want any more topics covered by emailing me here.

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