The broad dollar index has seen an impressive revaluation since early March, and it has helped spur a bid under many risk assets and anything dollar denominated, which very much includes metals.

The Japanese Yen in particular continues to impress, having strengthened against the dollar by over 10.5 percent since February alone. There are better long form explanations out there, but our assumption is that the Yen move can be attributed to two factors:

  • A collapse in commodity prices means net importers (of which Japan is perhaps the purest example) are no longer selling their own currency to buy petrodollars
  • Macro punters have lost any and all faith in Abe and Kuroda's ability to move the economy, especially since the much vaunted "third arrow" of reforms seems to have snapped on the bow.

While Japan is perhaps the purest play, it is indicative of what is going through much of the world as economists have their erasers out revising Fed hike forecasts for 2016 from 3-4 to 1-2. We have been short biased for several weeks against what seems to be an overly short market by many metrics, but the important caveat is that when the much larger markets (G7 FX and U.S. treasuries, in particular) are dictating for higher metals, they seem more than happy to oblige.

Bull Case

  • Dollar weakness. See above and below. If this persists, little else matters, but at some point a near 7 percent correction of the world's reserve currency in 10 weeks becomes overbaked.
  • A two-sigma move for the USD over any two-month period since the Bretton Woods era is about 7.5 percent. We are nearing flashing red light territory.
  • Lack of any immediate inflation gives the Fed plenty of time for pause. Import prices this morning were effectively flat.
  • After a four-week respite, gold and silver implied volatility in option pricing is getting a bid, and we hear wealth management firms are putting on bullish structures.
  • Given the uncertainty in political cycle, global growth, incredible levels of monetary accommodation, gold seems to be gaining popularity as a portfolio hedge.
  • Q1 growth initial estimates are anemic at best. Atlanta and NY Fed GDP now are showing +.1 percent and +1.1 percent respectively for Q1 annualized growth.
  • 14-day RSI not yet showing overbought. 14-week though, is at 65.

Bear Case

  • Market holding its sky-high net long positions. For the third week in a row, we had little change in spec positions but maintained near 12-month highs. That is not conducive for conviction in higher moves.
  • ETF builds have basically stopped dead in their tracks. See Chart 2.
  • Gold EFP is insanely high at 1.75/1.85. Contango is insanely high. Everybody is long everything.
  • Job market is still strong. There is some interesting data out that demographics will prohibit many from re-entering labor force, which means additional supply is likely from wage hikes long term.
  • Physical large-bar gold demand is still not where you would expect it to sustain the flat price move higher. Better but still not great.
  • Long Yen positions are the highest since 1992. Always scary to say things like that.

Chart 1

USD (inverted yellow line) against gold. During gold's outperformance v. the inverted dollar in February, we were very much looking for one to correct to the other. Interestingly, it was the dollar that snapped in line, not the other way around.

Chart 2

ETF builds seem to have taken a breather. The rate of change chart along the bottom shows how the start of 2016 were some of the most sustained additions since at least 2011. That has cooled off a bit.

Coin Toss

We aren't stepping in front of a train here, but the paradigm for gold seems to be stairs up, elevator down because of the incredible amounts of length built into the market. If we should test and fail the 50 DMA (currently 1,230), it would be the first time to do so since November, and I think CTAs and other quick money would take profits posthaste.

To completely remove any semblance of nuance, because ... gold: lower.