USD & Gold: The Bulls Vs The Bears

USD & Gold: The Bulls Vs The Bears

USD & Gold: The Bulls Vs The Bears


The notion of repeated cycles is timeless, it is how the ancient people perceived time: not as linear sequence of events, but as replaying patterns of Dark and Golden Ages.

Those of us that Chart the Market view it as struggle between The Bulls and The Bears, and the resulting trends, up and down.

Since the end of the Bretton Woods system back in the early 1970’s, USD has also moved in trends and cycles.

The chart below shows the trade weighted index of the greenback against the currencies of America’s major trading partners from Y 1973 until January 2018, with Bull and Bear markets marked with Green and Red arrows.

Chart 1: Bull and Bear markets in the USD; Trade Weighted Index against major US trading partners) from 1973 to January 2018.

Above we can see 3 Bull markets and 3 Bear markets (we are still in a Bull market).

When US President Richard Nixon closed the Gold window in Y 1971, the USD entered a Bear market which lasted until Y 1978.

Then, the Bull market started, as Paul Volcker, a Fed Chairman at the time, was squeezing inflation.

The Plaza Accord, which was an international agreement to depreciate the USD, ended the rally in the currency. It halted in Y 1995, as the money went to the US stock market to participate in the tech boom.

The appreciation endured until early Y 2002, the frame after 9/11 and the bursting of the dot-com bubble.

The following Bear market persisted until Y 2011, when the US economy roughly recovered after the Great Recession. Then, the most recent Bull market began. Depending on your view, it either ended in Y 2016, or is still running, and this fall is a correction on the path.

Analyzing the statistical properties of the past cycles, seen in the table below, to predict the future USD moves, as of mid-January 2018.

Table 1: Historical US dollar cycles from Ys 1971 (1973) to 2018.

The typical Bear market lived almost 9 years, or 106 months, and the Buck lost on average about 3.3% annually.

What is now more important is that the 1st 2 Bull markets lasted on average 79 months, or about 6.5 years, and the Buck typically appreciated about 6.9% annually in the frames.

The Big Q: What does it imply for the market now and forward?

Assuming that that the Bull market continues, at 81 months, it is old.

Notably, the USD is now 27.5% stronger than in Y 2011, while the average cumulative gain was about 54.7%. This might imply that the Buck has more room to rise, as it would have to reach about 105.37 points to terminate the Bull market.

And should this happen, it would be negative the Gold market, as the precious Yellow metal has an important negative correlation with the USD.

But, if the Bull market ended in December 2016, it would last only 68 months, so it would be relatively short, and the cumulative gain in that frame was 41.35%. closer to the average.

Based on the time frame, the current USD Bull market is old, but based on percentage change, we could still in a Bull cycle.

Since the cycles do not die of old age, and the current decline is a correction in the secular Bull market, this action will support Gold. 

The USD lost more than 10% since the December 2016, significant, but not radical to the norm.

Investors should be very cautious to draw conclusions on such limited data.

There were only 2 Bull markets before, so their potential to be used in statistical analysis is limited.

But we can say that the recent Bull market has been long enough to now trigger a period of weakness in the USD.

We can call it the entry to a Bear market or a correction in a Bull market, but it is not about the description.

It is about the revival of the Eurozone and worries about US President Trump’s economic policy and the US reliability as a military ally.

So, with that in mind, the Buck may depreciate further against EUR medium-term. Because, as the US economy stops being far ahead of other major economies, the USD would not be the only currency choice.

This would be Bullish for Gold.

However, we cannot ignore that the Fed’s tightening cycle may come to support the Buck eventually.

But now being close to the previous major lows, The US Dollar (.DXY) Index seems to be at a Key point and we should soon see if the decline continues or if a reversal happens.

We wait, we see.

Have a terrific week

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