The only similar case is the collapse of 2020 and its debunking in early 2022. At that time, the USD index continued to rise for about 15 index points. If the same thing happens again (note: I’m not writing about something completely new happening – I’m writing about the repeat of the recent past), then the USD index could rise to around 120 – it’s a critical, medium term high.
Can the USD Index Really Move That High? Yes – it would just be a rhyme from history, nothing particularly new.
The impact on the precious metals market would be negative, and the chart above shows just how bad things could get.
Given the recent extremely oversold value of the RSI and the high price of gold that has recently risen, there have only been two similar situations in the recent past: the 2011 high (just before) and the last high of 2008. Gold, Silver and mining stocks fell in both cases, so the implications are very bearish.
As a side note, the medium-term bottoms of the USD index are often accompanied by some sort of theory according to which the USD becomes useless and is replaced by other currencies. 2008 saw double the budget deficit, and recently de-dollarization is often cited as the reason for the dollar’s “inevitable” death. I received quite a few requests to comment on it when the USD index bottomed out earlier this year, and I’ll reiterate that it’s probably a sign of the bottom that this topic came up (a sign of extremely negative sentiment) and no valid fundamental reason for the continuation of the decline.
Maybe the world will move away from using the USD, but:
- This is unlikely to happen anytime soon.
- In my opinion it will be a step towards CBDC (not cryptocurrency) and not other fiat currencies.
If we go back to the chart above, the analogy with 2011 is particularly interesting – back then, gold continued to recover for some time after the dollar’s RSI fell below 30. The same thing happened recently, gold continued to rise and then made a clear top – just like what we saw in 2011.
Mining stocks and broader market trends
As I wrote yesterday, the situation for mining stocks would become particularly bearish if the stock market also fell. In particular, a collapse in world stocks (not just US) would likely trigger a significant decline in the mining sector.