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What’s driving gold’s bullish trend?

‘The dollar is losing ground against other countries, which generally…is quite supportive of commodities’: Petri Redelinghuys from Herenya Capital Advisors.

SIMON BROWN: I’m chatting now with Petri Redelinghuys, founder of Herenya Capital Advisors. Petri, good morning. I appreciate your time. You put out your Sunday note, as you do every Sunday. One of the charts you were looking at was the US Dollar Index. First, for some of us, help us understand what this index is and if it’s looking bearish – which is what your call is. You are saying that’s going to be quite supportive of commodities, and ultimately the rand as well.

PETRI REDELINGHUYS: Good morning. So yes, the US Dollar Index – basically what it is, is a weighted basket of other currencies versus the dollar. So it’s the dollar versus a basket of the euro, the pound; the rand is in there as well. So a number of different countries with different currencies are all being measured against just one, it being the dollar. So with the dollar index weakening, that means that the dollar is losing ground against other countries, which generally if you look historically at correlations and that sort of thing, is quite supportive of commodities. 

So, as the dollar gets weaker we see a number of different things. We see most countries generally want their currency, depending on their trade situation, [to generally be in] a sweet spot for them to have a currency [in a position] for their exports to make money, but their importers not to pay too much. 

So what we’ve seen in the past is that, when the dollar weakens versus other currencies, the commodity prices generally tend to rally, and equity markets tend to rally as well. And of course, emerging market currencies do as well. 

So, as long as we’ve got a weakening dollar situation, generally, markets are headed higher, particularly commodities. Of late we’ve seen the dollar weakening quite a bit for a number of reasons. One, that they keep printing more of them, I suppose, is a good reason, and that has been driving the dollar index lower and lower. And now we see the Dollar Index sitting just above the 90 levels at the moment. 

It spent a little bit of time below the 90 marks a few months back and subsequently bounced quite hard. But it looks to be testing that 90 levels once more, and it’s going to try and press beneath it a second time, the second time within the last sort of year and a bit. We’ll see exactly how this plays out. For the most part, this is generally a risk-on sign. It’s a measure of the overall temperature of the market right now. It’s going up. As long as the Dollar Index gets sort of below 90, commodities keep running, equities keep running, and markets are looking strong. How sustainable it is…

SIMON BROWN: We can worry about that in time. But commodities across the board – I spoke with you, was it a month ago? Back then gold was about $1 760/oz. You called it forward for $1 848/oz. We are a half a hop, skip, and a jump away from that. This bull market in gold – certainly across commodities we’re seeing it. And that trend on gold, having been bearish since August or so, is starting to look a little bullish.

PETRI REDELINGHUYS: Yes, We’re almost there. We’ll see what happens when we get to $1 840/1 850. I think above that we are in the territory where we are back into a primary bullish trend on gold. That’s also been driven by a number of different things. The index obviously is one of the drivers. The major driver there is of course a hedge against inflation. The Fed and other central banks – let’s not just blame America – have printed an enormous amount of money. And there are only really a few places you can hide from the effects of that. Precious metals is one of them. 

It’s not just gold, hey. Palladium is also trading at record highs. That’s like $3 000/oz. You mentioned iron ore in the interim, which is an industrial metal. And that’s been coming up some 10% a day for a while. So it seems as though commodities are the place to be right now.

SIMON BROWN: Absolutely. Across the board – copper, name a commodity, except perhaps oil not so much. Otherwise, they’re running. Petri Redelinghuys, founder of Herenya Capital, the bulls are running this market for now, and we are enjoying it as it lasts. 

Listen to Monday’s full MoneywebNOW podcast here.

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