Forex & commodities on December 14, 2017: thoughts & outlook


Here are my discretionary thoughts on forex and commodities (oil, gold, silver, etc). I only trade the S&P 500’s ETFs.

Thoughts

  1. Notice the USD’s abnormal price action
  2. There is a very strong inverse correlation between gold and USD right now
  3. January is a very bullish seasonality for the U.S. dollar.
  4. How do we reconcile the USD’s bullish seasonality with gold’s seasonality?

4 pm: Notice the USD’s price action.
At 2:20 pm, Senator Marco Rubio’s spokeswoman said that the Senator would vote “no” on the tax bill. This led to a selloff in the S&P, which is normal. But what’s weird is that the USD went up a little on this news! You’d think that the USD would go down on this news.

Regardless of this abnormal price action, the USD’s trend still points higher. The USD Index is making higher lows.

4 pm: There is a strong inverse correlation between gold and USD right now
There is a very strong INTRADAY inverse correlation between gold and USD.
Here’s USD

Here’s gold

In other words, gold’s short term direction is decided by the USD. Today’s gold and silver pullback is normal after yesterday’s spike. Wait until tomorrow to see if the precious metals bounce has a followthrough.
5 am: January is a very bullish seasonality for the USD Index
I previously stated that I think the USD will rally to 96 on the Republican tax cut. There is another factor that favors this case: seasonality.
Whereas December is the most bearish month for the USD Index, January is by far the most bullish month.

5 am: how do we reconcile the USD’s seasonality with gold’s seasonality?
There is an inverse correlation right now between the USD and gold. Here’s the correlation between UUP (USD Index etf) and GLD (gold etf).

It just so happens that January is also a seasonally bullish month for gold.

So how do we reconcile this discrepancy? Keep in mind that gold has risen in January every year from 2014-2017.
I think the answer is simple:

  1. January isn’t gold’s strongest month.
  2. Gold’s “get crushed in December, rally in January” pattern isn’t set in stone. Too many traders think that this pattern will repeat again in 2018. Patterns work until they don’t.
  3. The inverse correlation between USD and gold is undeniable. If the USD rallies to 96 in January, then gold will get crushed.

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