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A Few Thoughts on Silver, Gold and The US$

By: Erik Swarts | Saturday, February 16, 2013

Back in the end of June of last year, I adapted the comparative with silver from the Nasdaq top in 2000, to the prequel asset bubble of the late 1980's - the Japanese Nikkei market (explained Here). And although the Fed subsequently intervened with additional quantitative measures in September and once again in December - silver has continued to follow the momentum drain and profile of the Nikkei market.

1992 Nikkei versus 2013 Silver Chart

It has been my standing belief that since the US dollar bottomed in 2011, and despite the historic quantitative measures undertaken by the Fed - the precious metals, and peripherally the commodity markets - were large asset bubbles now on the backside of the cycle. It is why I have referred to the US dollar low comparative as "QE Free Vs. QE", because I wanted to make the not so subtle point that regardless of the Fed's hand, the US dollar was still carving out a secular low - very much along the lines of its last.

QE versus QE Free 1994-1997 USD and 2010-2013 USD Weekly Chart

Backing away from the more efficient market construct with the belief it is an imperfect calculus as to why any asset - let alone a currency, settles at an arbitrary price; I would argue the weight of causation tends to favor perception and the underlying market psychology of said asset - rather than the structural underpinnings themselves. I would argue this neatly explains the US dollar as the primary motivator of gold and silver and the historic commodity cycle over the past decade. They became - for all intents and purposes, massive currency hedges of the US dollar. Undoubtedly, there have been various supporting, propelling and governing measures for each respective asset along the way, but the US dollar - the world's dominant reserve currency - was the catalyst for concern with setting those fires ablaze in 2002 and the catalyst that is now extinguishing them as it pivots out of an intermediate-term low and away from another secular low.

Gold versus US Dollar Index Chart

Gold 1979-1981 versus Gold 2011-2013 Chart

Don't fret, there's plenty to be concerned with that will undoubtedly light the next asset fire in the capital markets - but the end of US dollar hegemony does not appear to be one of them right now.

 

Author: Erik Swarts

Erik Swarts
Market Anthropology

Although I am an active trader, I have always taken a broad perspective when approaching the markets. I respect the Big Picture and attempt to place each piece of information within its appropriate context and timeframe. I have found that without this approach, there is very little understanding of ones expectations in the market and an endless potential for risk.

I am not a stock picker - but trade the broader market itself in varying timeframes. I want to know which way the prevailing wind is blowing, where the doldrums can be expected and where the shoals will likely rise. I will not claim to know which vessel is the fastest or most comfortable for passage - but I can read the charts and know the risks.

I am not a salesperson for the market and its many wares. I observe it, contextualize its moving parts - both visible and discrete - and interpret.

I practice Market Anthropology - Welcome to my notes.

Erik Swarts is not a registered investment advisor. Under no circumstances should any content be used or interpreted as a recommendation for any investment, trade or approach to the markets. Trading and investing can be hazardous to your wealth. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This is strictly for educational and informational purposes only. All opinions expressed by Mr. Swarts are subject to change without notice, and the reader should always obtain current information and perform their own due diligence before making any investment or trading decision.

Copyright © 2011-2014 Erik Swarts