“May you live in interesting times” is a Chinese curse we seemed to have befallen. After all, there is nary a whiff of inflation anywhere but we find gold close to its multi-decade high. And gold sentiment is running at a euphoric 98% (according to the Daily Sentiment Index). Meanwhile, US dollars, considered by many the kryptonite to gold’s Superman, is also at 52-week highs with similar bullish sentiment.
Recently the Daily Sentiment Index for the US dollar spiked to 98%, slightly higher than the 93% bullish level we saw back at the start of 2009. That previous peak in bullish sentiment coincided with the peak in the US dollar index as you can see from the annotated chart above. So as contrarians we have to look at the current level for the US dollar with some skepticism. But this has implications for the Euro and gold as well.
The current zeitgeist binding the three together has more to do with a stampede out of Euros and into “anything but Euros” than a fundamentally driven demand for gold as “safe money”. As we discussed recently in our coverage of current gold sentiment, the DSI for the Euro is a dejected 2% - which would imply that pretty much everyone who wanted to get out is out. As capital flees Euroland to the US, Japan and Switzerland it isn’t too difficult to imagine that this trade has reached or will soon reach its zenith and unwind. Nevermind the surreal condition where both gold and the US dollar are both equally beloved to retail investors.
It is also interesting to notice that the US stock market enjoyed one hell of a run during the last decline in the US dollar index. From early 2009 until late 2010 the S&P 500 index rose from 700 to 1100 in an incredibly powerful momentum thrust. As the US dollar staged a huge rally from the low DSI readings of 3% the S&P 500 has had great difficulty in making headways.
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