Stage is Set for GFC Level Currency Moves

Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

Today's bonus chart depicts the relationship between the US Dollar Year-over-Year (DXY) and the Dow Jones Precious Metals Index over a decade. Generally, they exhibit an inverse correlation. When the US Dollar Index strengthens, the Precious Metals Index tends to decline and vice versa. This is especially noticeable between 2014-2017 and 2019-2022. A stronger US dollar can make dollar-priced commodities, like precious metals, costlier for foreign buyers, decreasing demand. Conversely, a weaker dollar can increase demand, raising their prices.

The interplay between the US Dollar and Gold during the 2008 recession is noteworthy. Gold declined by 34% in 2008, while the DXY surged by 19% in the same timeframe. After the most significant equity selloffs had passed, Gold rebounded from $670 to nearly $2000 over several years, curiously mirroring the dollar's rise after an extended consolidation phase. Extreme market volatility can briefly alter the Dollar-Gold correlation, with investors offloading the liquid assets they have. Gold is liquid either when it melts at 1948 degrees Fahrenheit or during margin calls, which can feel like 1948 degrees Fahrenheit.

It's worth noting that DXY primarily represents the EUR/USD (57.6%), complemented by the Pound, Yen, CHF, CAD, and others. The key takeaway from today's chart isn't solely about precious metals but more about the potential trajectory of the DXY. Currency trends evolve gradually, suggesting the EUR/USD will drop well below parity, a significant slide from its current 1.0550 rate. Those familiar with forex understand the magnitude of this potential movement. That’s a big currency move.

Learn more about the Market Situation Report written by Tier 1 Alpha.