US Dollar Index Is Looking Fragile

What happens with the US dollar Index over the next two months is going to be extremely important. Important not only for the precious metals themselves but for most world commodities and currencies. The world’s reserve currency is at a critical juncture. We still see a few mainstream analysts discussing the ramifications. There appears to be a reversal lower in the works for the dollar -- either imminently, or at the latest by end-2017.

US Dollar Index

For reference, the dollar had been consolidating for nearly two years between 92 and 100 on the US Dollar Index. This shows below. In November, that consolidation broke out to the upside. This corresponds with the weakness seen in precious metals late in the year. This past week we have seen a bounce in the dollar. This is at the lowest possible technical level for us to consider the November 2016 breakout still valid. Specifically, after falling for the last five weeks, the dollar rebounded at 99.5. It additionally saw a close the week higher by 0.9%. It went to finish at 100.8 on the Index. The medium-term perspective is updated below:     The dollar holds at the lowest threshold where we could consider its breakout to remain valid. (99.5). However, the US currency is looking increasingly fragile from a technical standpoint.

The weakness of the breakout is not indicative of a market that prepares to move higher over the long run.   

As an essential data point is the most recent low of 99.5, (Second retest of the breakout.) It matches the level of the first retest from November 2016. We thus do not have a higher low in the US Dollar Index following the initial breakout. New bull markets, especially in their early stages, should be characterized by higher highs. Additionally, higher lows for medium-term pivots. A breakout from a two-year consolidation should feature an impulsive move higher. Subsequent retests (lows) should come at sequentially higher levels.

Again, at this time we can observe that the most recent low in the dollar was not higher than the December low.

This is a negative technical divergence. It leads us to suspect a reversal lower of a multi-year magnitude is in the early formation stages. The only question is: does sustained dollar weakness materialize within the next two months? Or will a grinding advance continue for the remainder of this year first? We do not have enough data yet to answer that question. However, those with an eye for long-term secular trends in the commodity and currency markets should be paying attention to this action in the US dollar very closely.

Silver to Be a Major Beneficiary

If there is to be a falling US dollar Index backdrop within the next year, we would expect inflation to begin to pick up in the United States. Generally speaking, a falling US dollar will cause prices of commodities and international trade items to be more expensive. This is as priced in the falling currency. Precious metals should “sniff” this inflation out ahead of time. Sort of like a well-trained hound. Further, in an inflationary environment, silver should outperform gold on a relative basis. This is because the former has greater industrial usage in electronics and solar fabrication. These are industries that would be supported by overall rising prices. Such is precisely what we observe since the recent December 2016 lows. Silver has outperformed gold by over 5.3% in less than two months.

Silver Recent Technical Analysis

Silver finished higher by $0.45 (2.6%) to close at $17.93. This is of the final trade on the New York COMEX on Friday. The advance in silver spot price this week resulted in a break of the best-fit trendline. This was of the declining primary channel that we have been observing since early July. (royal blue trend channel). Hence, a positive sign for the entire precious metals complex. The price continues to strengthen the legitimacy of the breakout we saw above $17.25. (black horizontal line) Its resistance two weeks prior.

Silver looks healthy at this juncture.

Despite the rising from the December lows, we observe the RSI indicator (top of the chart) is not yet at an overbought reading. It was during medium peaks in 2016. Silver appears to have more room to run on this advance. We should expect some grinding price action with short 2-3 day corrections over the next two weeks. This is as traders ascertain the legitimacy of the breakout. Silver should support at $17.00 - $17.25 on any weakness. Our near-term target for silver is $18.75. Then we will evaluate the possibility of an intermediate correction.