Let’s take a look at the dollar.
As we said last week, following the Fed action, the bigger 50 basis point cut was clearly dollar negative. While the first move was up, the direction has since been down.
And as you can see in the chart, it looks like it’s breaking down technically …
And as we’ve discussed, the Fed has kept real interest rates (Fed Funds Rates minus the inflation rate) at historically high levels, and now that real rate is coming down, and has a lot of room to continue coming down before the Fed gets rates to what they consider “neutral” (neither restrictive nor stimulative to economic activity).
And the dollar tends to follow the direction of real rates.
For more perspective, let’s revisit the long-term dollar cycles, which we’ve kept an eye on throughout the history of my daily note.
Since the failure of the Bretton-Woods system through the onset of the Global Financial Crisis, the dollar traded in five distinct cycles – spanning 7.4 years on average. And the average change in the value of the dollar (in those five cycles), from extreme to extreme was greater than 50%.
As you can see, the era of quantitative easing (QE) has seemingly distorted this last bull cycle.
The top was in late 2022, just after the Fed started QT (quantitative tightening/reversing QE).
And now we’re in a dollar bear cycle. And that aligns with the outlook for the bull market in commodity prices (lower dollar, higher commodities prices).
With that, we’ve seen it reflected in gold.
We’ve often looked at this longer term chart of gold over the years, since it was trading in the $1,600s in March of 2020. Spot gold is now closing in on this $2,700 level that we’ve been projecting from the technical analysis (Elliott Wave Theory).
With this chart above in mind, gold tends to trade inversely to real interest rates. And as we discussed above real rates are just beginning to decline and have a ways to continue lower. And it happens to be as gold is already on record highs, driven by the U.S. fiscal profligacy of the past few years, global money printing, seizure of Russian assets and geopolitical risks.
So gold still has room to run. And the commodities bull cycle in general is young. Broad commodities prices remain at historically extreme cheap levels relative to stocks.