Monday Markets — US Dollar, Gold and Bitcoin Revisited

Monay, 12 April 2021
Melbourne, Australia
By Greg Canavan

[3 min read]

A few weeks ago I told you to keep a close eye on the US dollar. It bottomed back in January and, despite all the talk about it cratering thanks to ‘stimulus’, it has been moving steadily higher.

In fact, the odds of it moving into a new upward trend are increasing. It has a bit more work to do yet, but as you can see in the chart below, the dollar looks interesting here.

It has made a series of higher lows and the moving averages have just crossed to the upside. The reason I highlighted the US dollar in previous issues is because if it does enter a new upward trend, it will put pressure on the ‘inflation trade’ that everyone has been enjoying so much lately.

By that I mean rising commodity prices and rising share prices in general. A falling US dollar usually means party time for global equity markets.


Source: Optuma

[Click to open in a new window]

But a rising dollar? Well, it depends on what is driving it.

It could be bullish in that it’s rising due to a relatively strong US economy. It represents capital flowing into the US to capture some of the gains. The rise in US bond yields over the past few months are a sign of this.

But it could also be bearish, a reflection of tightening global liquidity and a more defensive positioning by global investors.

That would make sense given the recent moves by the Biden administration to increase the corporate tax rate from 21% to 28%. Tax increases lower companies’ intrinsic value because it means more of the profit goes to the government, not shareholders.

But in a raging bull market, investors will ignore a potential change like this.

Either way, a rising US dollar has big implications for Aussie investors. For example, I’ve shown this chart before, but it’s worth repeating. Below is the Chinese yuan/US dollar exchange rate, with the iron ore price overlaid.

As you can see, the yuan has started to fall (as the US dollar strengthens) but the iron ore price is still holding up. If it were to track down to the yuan, it would fall from around US$170/tonne to US$150/tonne.


Source: Optuma

[Click to open in a new window]

That’s still a very high price for iron ore. But if the trend is now towards a rising dollar, you should expect more falls. That will in turn put pressure on the iron ore miners.

It will also have an impact on the Aussie dollar, which is in the process of potentially moving into a downtrend too (see chart below). A fall below 75.8 would be bearish for the Aussie. It’s currently trading around 76.2.


Source: Optuma

[Click to open in a new window]

Now, let’s get down to business and have a look at how gold and bitcoin have handled the strength in the US dollar this year.

Bitcoin has been a runaway train. The rising US dollar hasn’t bothered it in the slightest. But…it’s worth pointing out that the strength of the advance has been waning ever since the US dollar turned higher in January.

The chart below shows the price of Bitcoin [BTC] diverging from its relative strength index (RSI), which is a momentum indicator. The RSI peaked on 7 January. The US dollar bottomed the day before. 


Source: Optuma

[Click to open in a new window]

Since then, bitcoin has gone on to new highs. But as you can see, price and momentum have diverged since early January. I posted the above chart on twitter last week. Our resident crypto expert Ryan Dinse responded with the following:

I’ve never seen that indicator work that way in bitcoin. Not to say it won’t (hedged!). In my observations more important seems to be the 50 RSI level holding (give or take a little bit in short term). In other words as long as momentum remains +ve price tends to follow.

Ryan has called bitcoin far better than me so I will defer to his analysis. That is, as long as RSI holds above 50, that is more important than the divergence you have seen between price and momentum.

Still, it’s worth asking the question: Can the bull market in bitcoin continue if the US dollar starts to trend higher?

My guess would be no, it can’t.

That’s not to say that the party is over for bitcoin. I think as a financial asset and disruptive technology, it is here to stay. And as Woody pointed out in Friday’s Insider, we’ll be devoting lots of time over the next few weeks to digging into this new game of money and the financial system that is growing up around it.

What is happening beneath the price of bitcoin is truly revolutionary. But for now, I’ll focus on the price. And I’ll be very interested to see whether bitcoin can continue to advance in the face of a stronger dollar.

What about gold though?

Well, it’s another asset that people associate as an anti-US dollar trade. But I don’t think it’s as clear-cut as that. For example, gold has declined over the past eight months, alongside US dollar weakness.

And now, as you can see in the chart below, gold looks like it could be forming a bottom. That is, gold has shown good strength over the past couple of months, in the face of US dollar strength.

The chart below certainly looks interesting. A large consolidation pattern appears to be forming. If the recent lows can hold, and gold can then break up through the downward sloping trendline, that will suggest the bull market is back on. 


Source: Optuma

[Click to open in a new window]

It’s also positive to see gold equities outperforming gold over recent months, as shown in the chart below…


Source: Optuma

[Click to open in a new window]

If this trend continues, it might signal the bottom is in for gold. And if bitcoin does take a breather here, it could provide momentum for the gold trade, which has massively lagged the bitcoin run this year.

Much of that has to do (I think) with the fact that bitcoin sits outside of the traditional finance system, while gold is firmly tied up in it. That’s a disadvantage for gold…for now. But as blockchain technology becomes more prevalent, ironically, gold could be one of the biggest beneficiaries.

We’ll have more on that, and other stuff on the intersection between new and old money for you in the coming weeks, so stay tuned. It will be a fascinating conversation.

Continue below for Murray Dawes’ ‘Week Ahead’ update. This week, Murray discusses the issues of digital ad fraud, with around 20% of ad spend lost to fraud. And this company thinks they have a solution.

Cheers,
Greg


[WATCH] Ride the Digital Ad Wave

By Murray Dawes

 

The digital ad market is becoming immense. With numbers around US$330 billion and growing at 13% CAGR, it is a sector worth exploring.

The company I discuss today has a novel solution to a gigantic problem within the digital ad space: fraud.

Did you know that around $1 in $5 spent on digital ads is lost to ad fraud?

That means of the $330 billion dollar figure above, $66 billion is going up in smoke!

If you could find a solution that could lower that cost would you be interested?

This company claims to have a solution and there are a few large companies that have already jumped on board.

They also have some interesting backers, which adds to the appeal.

It is still early days, but an announcement made today showed that they are heading in the right direction.

Regards,

Murray Dawes Signature

Murray Dawes,
Editor, Pivot Trader