DXY and GSR: 2 Horsemen of Macro Apocalypse

Dollar Index and the Gold/Silver Ratio...

The TWO HORSEMEN of the Macro Apocalypse are the US Dollar and the Gold/Silver ratio, writes Gary Tanashian in his Notes from the Rabbit Hole.

When the global market counterparty – the US Dollar (DXY) – and the Gold/Silver ratio (monetary, counter-cyclical vs. a less monetary, more cyclical/industrial precious metal) rise moderately, then the indication can be Goldilocks/disinflation, like the backdrop we've generally had for a year now.

But when they rise strongly or impulsively, the indication is to get the hell out of the asset pool, because its liquidity will be drained.

When they drop together, the indication is for a macro party that can include and eventually favor commodities, inflation trades and a generally wider scope of bullish assets than the Goldilocks Tech/Growth theme. This would include the precious metals, given that the elusive longer-term bullish backdrop (post-bubble contraction) is not yet in play.

(With silver leading gold, the precious metals would likely rally along with the inflation trades as they so often do. The best fundamental backdrop would come after the big macro bubble pops, which is not yet the case.)

The US Dollar index is lurking below the pivot point of the December high, which would indicate a shift to an intermediate uptrend and test of the 105.90 area. It already poked above and now flags at a decision point. For their part, RSI looks orderly climbing its EMA 20 and MACD is positive.

The Gold/Silver ratio, however, is not looking stellar in support of USD. The trend is still biased up, but thus far there's been nothing even approaching impulsive and if this were a stock chart we'd be considering the possibility of a short-term double top. In NFTRH we had noted that the up leg in the Gold/Silver ratio that began on December 1st was a positive divergence to the US Dollar index, which finally followed suit at the end of the month.

If USD and the Gold/Silver ratio continue as they have been, bullish biased but not impulsive, Goldilocks can persist.

If USD and the Gold/Silver ratio rise impulsively, pain will likely sweep across the market landscape.

If USD either fails here or continues firm but not impulsive, a decline in the Gold/Silver ratio could diverge and lead to future USD downside (much as it led the upside), allowing cyclical inflation trades and precious metals to enter the party and approach the punch bowl.