Only two things
1) Sentiment was so extreme against it
That is a pretty powerful argument is it not?
Here is the sentiment side:
The mainstream press (Newsweek) finally addresses the US$ on a features cover, Buffet is shorting the US$ and Billy Come Lately (Bill Gates) does the same thing. OK where were these guys two years ago? Let’s look at a chart:
Since then lots of people are jumping on the US dollar bandwagon, the falling dollar is no longer news, and the shoeshine boy is no longer telling you to short the dollar but to buy real estate. Sentiment has perhaps shifted but what about fundamentals? Good question. Let’s take a look.
Many people (in fact nearly everyone) thought that the fundamentals of the US$ could hardly be worse. Was that really the case? One of the biggest factors in currency moves is interest rate differentials and expectations of future rate hikes or rate cuts. Many people, myself included, did not think the US would get this many hikes in. Then again, some treasury bears and hyperinflationists on the other hand thought interest rates would soar to the moon. Oddly enough it seems fundamentally wrong (to me anyway) to have a view of hugely rising US interest rates and at the same time be bullish on gold and bearish on the US$. Sure enough, gold miners collapsed. It’s not that US interest rates are rising per se that is lending support to the US dollar, the pertinent point is US interest rates are rising as compared to other countries. Let’s take a look.
Right there in a nutshell you have the answer to why gold miners have been weak and why the US$ has been strong. The FED is the only country currently hiking (against the belief they would quickly pause) and other countries are on hold, or in the case of the UK and Australia, expected to have rate cuts.
Following are the major fundamentals supporting the US$.
1) Currently the FED still sees interest rates as being “accommodative”.
2) The Fed Funds have expectations of future hikes priced in so more “measured” rate are expected in the coming months.
3) The US Federal Reserve remains the only central bank on a committed tightening track.
4) Rate cuts are now expected to be the next move by central banks in a number of other countries.
5) Reality or not, the perception is that the US is still strongly growing but that Japan, Italy, and Germany are in or near recession.
6) Greenspan is likely to keep hiking until housing comes unglued. The FED seems increasing worried about the housing bubble as admitted to by none other than Greenspan himself. This idea was discussed in Concern About Froth.
If seems the market finally understands that Greenspan is committed to hiking. A reversal (which I think is coming) is for sure not priced in. It is not priced into gold or the US dollar. In the meantime sentiment against miners has gotten so extreme that the downside may be limited from here. George Palous at Freebuck suggests that in his article Are the Stars Finally Aligned for Gold Stocks? Michael Swanson discusses the same idea in Three Signs of a Gold Bottom.
My take is that sometime between now and July, gold miners will bottom and the US$ rally will peak. The exact timing depends on a number of factors including but not limited to, housing, the EU constitution, trade wars, geopolitical uncertainty, and interest rate cuts in the UK.
Seasonally gold tends to do well in an August timeframe, and if US housing weakens and/or the FED pauses, the stars will indeed be aligned for gold and gold stocks. The best case scenario for a sustained rally is that we build a long base here rather than blast off.
Mike Shedlock / Mish/