Precious metals haven't done much lately… which is puzzling.
When you think about the current environment, the catalysts are lining up for precious metals to outperform…
- It's all about the U.S. dollar…
- Versus the Australian dollar
- Versus the British pound
- Versus the Euro
- Gold Price Action
- Silver Price Action
Geopolitical risks are rising, with Russia and China threatening conflicts with Ukraine and Taiwan, respectively…
Plus, inflation is the highest it has been in almost 40 years. And there's a lot of uncertainty about where the economy is headed.
Usually, precious metals soar in those conditions. Yet gold and silver have stayed fairly flat.
Today, I'm going to dig into the big reason for this… And I'll share what to expect for precious metals and precious metals stocks from here.
Inflation, deflation, or stagflation…
These are different environments that the economy can experience. Jobs levels, wages, consumer prices, and interest rates all dictate which stage the economy is currently in and what could come next.
When the Federal Reserve goes on a spending spree after a crisis, what happens next is inflation and a devalued U.S. dollar… And at that point, precious metals typically start to outperform.
We saw this after the dot-com bust in the early 2000s… after the great recession in 2009… and, most recently, after the March 2020 COVID-19 crash.
Precious metals rallied sharply in all three of these market environments. But lately, despite multidecade highs in inflation, precious metals have yet to soar…
The price of silver hasn't hit a new high since February 2021 – almost a year ago – and gold made its last high all the way back in August 2020.
So what gives?
It's all about the U.S. dollar…
With inflation rising, the U.S. dollar is rising too. The Federal Reserve is pulling back its monetary policy… which reduces overall U.S. dollars in the global economy. So investors, especially those overseas, see the dollar as more attractive versus their own country's currency.
It's simple economics – if there's less supply and high demand, prices will rise.
When you're analyzing currencies, it's all about the relative value of one versus the other… Which currency has a higher interest rate, and what are the expectations going forward for each country?
And gold and silver are no exception to this rule.
Instead of getting bogged down with the nuances of currency analysis, though, let me just show you what's more important – the price action…
I'll outline three important currency pairs versus the U.S. dollar. We'll look at the Australian dollar, the British pound, and the euro – lining them up so you can see how similar they are to the setup in precious metals.
Here's a price chart of the Australian dollar…
The rise from early 2020 reflects the strength of the Australian dollar and weakness of the U.S. dollar. The top in February 2021 shows that the U.S. dollar is now strengthening.
Here's the British pound…
You can see the same thing happening here. The pound rallied since 2020 while the dollar weakened. But since June of last year, the dollar has made a comeback, contributing to a fall in the pound.
Lastly, here is the euro…
The euro has lost considerable ground to the U.S. dollar. Simply put – all three currencies topped out last year as the U.S. dollar began to strengthen.
Now, take a look at gold's price action…
See the similarity here? Gold experienced the same strength off the 2020 low, but has since failed to make new highs.
It's happening in silver, too. Take a look…
The evidence is clear. The price action across these major currencies, along with gold and silver, is reacting to the strength of the U.S. dollar.
It doesn't matter that inflation is elevated on a relative basis around the world… Dollars are in high demand versus other currencies. And precious metals are in this basket, too.
Now, I still like the long-term setup in gold and silver.
From the March 2020 low, both gold and silver (and the major currencies) are still in an uptrend, technically speaking. But we have to be patient.
Putting on a trade when markets like gold and silver are chopping around for months isn't ideal. That's still happening right now… So make sure you wait before jumping into precious metals.
Greg Diamond, CMT