USD Remains Cool Amid Geopolitical Chaos

Gold and the USD Indexes reacted energetically to the concerns raised by Eastern Europe’s tensions. However, only the US dollar can stay cool about its medium-term future.

Geopolitical tensions uplift gold, silver and mining stocks, they are in rally mode each and every minute a doom-and-gloom headline surface. However, while the prevalent uncertainty guide and dominate investors’ attention, the USD Index continues to behave rationally. For example, while volatility has increased recently, the dollar basket has held firm.

The USD Index is at its medium-term support line. All previous moves were followed by rallies, sometimes really big rallies, so markets are likely to see something like that once again.

Such a rally would be the prefect trigger for the triangle-vertex-based reversal in gold and the following slide.

Furthermore, the USD Index’s recent pullback was far from a surprise. For example, at numerous occasions, the US dollar was nearing its weekly rising resistance line, and the price action has unfolded as I expected.

Moreover, while overbought conditions resulted in a short-term breather, history shows that the USD Index eventually catches its second wind.

Observers marked additional situations that were recent cases when the RSI based on the USD Index moved from very low levels to or above 70. In all cases, there was some corrective downswing after the initial part of the decline, but once it was over, and the RSI declined somewhat, the robust rally returned and the USD Index moved to new highs.

As a result, with the USD Index showcasing a reliable history of profound comebacks, higher highs should materialize over the medium term.

Just as the USD Index took a breather before its massive rally in 2014, it seems that markets saw the same recently. This means that predicting higher gold prices here is likely not a good idea.

With the USDX’s long-term breakout clearly visible, the wind remains at the dollar’s back. Furthermore, dollar bears often miss the forest through the trees: with the USD Index’s long-term breakout gaining steam, the implications of the chart below are profound. While very few analysts cite the material impact (when was the last time you saw the USDX chart starting in 1985 anywhere else?), the USD Index has been sending bullish signals for years.

The financial markets remain on Russia-Ukraine watch. While gold, silver, mining stocks, and the USD Index whipsaw on the news, the technical and fundamental backdrops support higher prices for the latter, not the former.

Thus, while geopolitical tensions are always short-term bullish for the precious metals, the rush is often short-lived. As a result, the trios’ downtrends that began in late 2020 will likely resurface once the headline-driven market returns to normal.