In two musings last November, I explored the correlations of metals and oil prices with the US dollar index (Mercenary Musings November 14, 2014; November 24, 2014). My treatment documented strong negative correlation coefficients for DXY with world-exchange traded commodities from mid-July thru late November. I will update the data and present current thoughts below.
DXY closed at 79.99 on July 9 and then began a sustained uptick. Upon Friday’s close at 94.18, it had gained an impressive 18% in seven months. However, note that the dollar index has been flat for the past three weeks:
Meanwhile, gold made an impressive run in January and touched $1300/oz when the Swiss cut currency ties with the Euro. Since then, the price has weakened and backed off to the low $1200s over the past week:
From July 9 to November 22, the DXY and gold correlation coefficient was -0.96. An inverse relationship is a usual paradigm because gold priced in US$ will concomitantly go up or down as the dollar weakens or strengthens. Of course, there are many other factors that can affect the value of gold.
Subsequent to this musing, the dollar and gold established a rare positive correlation beginning in mid- December (Mercenary Musing January 26, 2015). Here’s the correlation chart from December 19 to February 13:
Since mid-July, silver has been relatively weak and has traded in synchronization with gold but with its usual higher volatility. Currently the Au:Ag ratio is in the low to mid-70s, levels not seen since the fall of 2008. Here’s the silver price chart:
Silver’s correlation with DXY thru late November was almost perfect at -0.98. Because it mimics the movement of gold, silver also shows a positive coefficient from December 19 to the present. That said, the data has become quite scattered since the dollar index reached 94:
Platinum was extremely weak losing 25% of its value from July to November whereupon it stabilized in the $1200 range. Platinum is once again trading at a discount to gold with the current ratio at a little less than 1.0.
The noble metal’s weakness comes despite strong demand for petroleum-fueled vehicles in China and the United States and all-in mining costs for dominant producer South Africa far exceeding the current price:
The DXY correlation coefficient was -0.98 in my previous musing. Although platinum retains a strong inverse correlation to the dollar index, it has shown divergence from a rising dollar in the new year:
Meanwhile, palladium has traded in a somewhat contrary fashion to the other precious metals. It reached a 13.5 year high in August; then its price was affected by the strong US dollar. The Pt:Pd ratio now stands at about 1.5, a low not seen for nearly 12 years.
The fact that palladium is largely an industrial metal, the aforementioned strong demand for gasoline-burning automobiles, and major producer Russia’s collapsing currency due to economic sanctions and low oil prices account for its strength relative to the other precious metals:
Palladium has a seven month correlation coefficient of -0.72 and has been range-bound recently despite the rising dollar:
Copper is the most important industrial metal traded on the world stage. It has exhibited prolonged weakness in periodic steps downward, losing 20% in US dollar terms since July. China’s slowing economic growth has weighed heavily on speculation in copper and other industrial metals.
However, copper has a projected supply deficit for 2015, there are low warehouse stocks worldwide, and annual demand growth continues unabated.
Previously, DXY and copper were negatively correlated at -0.85. That relationship has now strengthened significantly:
Now let’s look at the collapse in crude oil prices over the past few months. Although it is the commodity most subject to geopolitical events and we have certainly had a bevy of those lately, oil has lost over 50% of its value since July 9. This dramatic fall from a sustained period of $100/bbl prices is a function of steadily increasing supply from North American unconventional producers and a lessening of demand worldwide.
Oil traded as low as the mid-$40s in January but has rallied to the low $50 range this month:
In late November, the DXY to WTI correlation stood at -0.90. In the intervening three months, oil has developed an even stronger inverse correlation with the US dollar:
These charts combined with supply-demand fundamentals allow some short-term predictions on the US dollar and commodity prices:
Ciao for now,
Acknowledgment: Gwen Preston is the editor of MercenaryGeologist.com.
The Mercenary Geologist Michael S. “Mickey” Fulp is a Certified Professional Geologist with a B.Sc. Earth Sciences with honor from the University of Tulsa, and M.Sc. Geology from the University of New Mexico. Mickey has 35 years experience as an exploration geologist and analyst searching for economic deposits of base and precious metals, industrial minerals, uranium, coal, oil and gas, and water in North and South America, Europe, and Asia.
Mickey worked for junior explorers, major mining companies, private companies, and investors as a consulting economic geologist for over 20 years, specializing in geological mapping, property evaluation, and business development. In addition to Mickey’s professional credentials and experience, he is high-altitude proficient, and is bilingual in English and Spanish. From 2003 to 2006, he made four outcrop ore discoveries in Peru, Nevada, Chile, and British Columbia.
Mickey is well-known and highly respected throughout the mining and exploration community due to his ongoing work as an analyst, writer, and speaker.
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