This is a classic dead cat bounce by the US Dollar as it appears to fight desperately to avoid dropping below the much watched ‘72 level. We say fight, but the real situation is not a fight at all, it’s a managed decline by the United States to lower the value of their currency and ultimately inflate away the mountain of debt that it realizes is impossible to ever re-pay.
The difficulty in getting the value down is that just about all of the other major currencies are in the same race and are also hoping to inflate away their debts. The penetration of ‘72 lies just ahead of us and once a meaningful break through has been achieved, then the fall will be calamitous to say the least, as those who are holding dollars will battle to get through the exit with great haste. However, the ‘managed’ downward trend will resume shortly. Also of note on the chart above is that after only two days of trading, the dollar rose from an oversold position, where the RSI was sitting at sub ‘30 just days ago, to stand at 52.18 today. In our humble opinion those who are calling for a dollar bounce of some significance and going to be rather disappointed. The political will to do the hard yards is just nowhere in sight as the pressure mounts to raise the debt ceiling a tad in order to keep things sweet.
It is said that nothing goes down in a straight line and as we can see with the bounce by the USD it is also capable of generating small rallies from time to time, which is quite normal. We can also observe this behavior in the way that silver prices rose dramatically and then corrected severely. Again this correction is normal and short term corrections are par for the course in a bull market.
The main beneficiaries of weaker currencies are both gold and silver, both of which cannot be printed and therefore the supply is limited by the skills of the mining sector to find and mine these precious metals. Now, as a form of exposure to precious metals the mining sector offers the possibility of leverage to the underlying product. So let us take a quick look at the gold bugs index, the HUI, which consists of 14 major gold mining companies which mostly do not forward sell their product and as such offer exposure to metal prices.