Just when everyone had left U.S. dollar for dead, abandoning the world's reserve currency for alternatives like the Swiss franc and gold bullion, like it's risen from the dead. Like Lazarus. Only instead of waiting four days for resurrection, it's taken the dollar more than 15 months to perk up again.
The catalyst, as I discussed in a blog post last week, has been weakness in the euro as currency traders anticipate an end to the European Central Bank's rate hiking campaign at its next policy announcement on Thursday. After raising rates twice this year, the expectation is that the ECB will have no choice but to lighten up as bond yields in Greece, Italy, and Spain rise on renewed sovereign debt concerns. Also contributing was a move by the Swiss National Bank to peg the franc to the euro to stem a flood of "safe haven" inflows into the currency -- an action that has weakened the euro vs. the dollar.
As a result, dollar-sensitive assets like crude oil, copper, and precious metals came under pressure in Tuesday's trading. But while I think crude and copper will rebound along with stock prices as traders discount a reacceleration of economic growth thanks to soon-to-be-announced stimulus measures, the same can't be said for gold and silver. Here's why.
For one, the fundamentals are changing. Precious metals have benefited from all the fear and panic of the last two months which is now beginning to fade. And as witnessed by yesterday's better-than-expected ISM services report, the economy isn't falling off a cliff just yet.
Technically, silver prices formed a "bearish engulfing" pattern as it tested its August 22 high while silver formed a bearish "abandoned baby" candlestick pattern. By all indications, it looks like an uptrend failure to my eyes. And that means a rush of late-arriving speculative buying in gold and silver is about to be unwound in a big way. Big parabolic up moves like the one we've seen in gold over the last few months tend to be reversed in similarly dramatic fashion.
In anticipation of this, last week I recommended my newsletter subscribers take profits in their precious metal mining positions and closed these positions out of the Edge Letter sample portfolio that tracks my MSN Money recommendations in real time.
Now, it's time to go short. While gold has been the center of attention lately (silver's bubble burst back in May), I still think focusing on silver is the way to go. Not only is silver demonstrating relative weakness against gold right now, but it tends to be much more volatile. When capturing rapid, short-term movements like this, volatility is a good thing.
For that reason, I'm recommending the ProShares UltraShort Silver (ZSL). For those who want to focus on gold instead, check out the ProShares UltraShort Gold (GLL). Both are 2x inverse leveraged ETFs, so beware: They're risky and not suitable for everybody.
It's still too early to tell whether this is "the top" for precious metals. The last time the dollar rebounded was in late 2009 as sovereign debt concerns first started to percolate (remember the worries about Dubai back then?). The dollar's rise lasted for seven months. Gold prices were under pressure for four.
