How many of you saw posts about Saudi Arabia ditching the USD (“end of the petrodollar”)?
I see many raised hands. Indeed, quite a few analysts and (mostly) journalists elaborated in recent days on the “end of the Petrodollar Agreement”. The logic went something like this:
The USD is world’s reserve currency, mostly because it’s used to pay for crude oil, which is the most versatile of the commodities. As the Saudis just decided to ditch the agreement to use the USD, the world reserve currency status for this currency has been put into question. Consequently, the value of the USD is likely to decline, and anti-dollar assets like gold and cryptos are going to soar.
De-dollarization is on the way.
And yet, something might seem fishy about this narrative. First of all, it’s not the first time we hear that the USD is a worthless piece of trash. Do you remember when that view dominated?
Ok, there were many occasions, but this was particularly the case in 2007. That’s when the USD Index was after a prolonged decline.
It turned out that the USD Index actually formed an all-time low at that time. What happened in the following years was “pro-dollarization” and not de-dollarization.
Of course, this time could be different because the Saudis are breaking the agreement… There’s only one problem with this argument.
There was no official agreement.
As per Morningstar’s article, perhaps the closest thing to a petrodollar deal was a secret agreement between the U.S. and Saudi Arabia reached in late 1974, which promised military aid and equipment in exchange for the Kingdom investing billions of dollars of its oil-sale proceeds in U.S. Treasurys, Donovan said.
(…)
Even more importantly as far as the dollar's reserve status is concerned, the currency or currencies used to make payments for oil (BRN00) (CL00) are of secondary importance. What matters most when it comes to the dollar maintaining its role as the world's main reserve currency is where oil exporters like Saudi Arabia decide to park their reserves, Donovan said.
None of this seems likely to change, with the U.S. and Saudi Arabia reportedly on the cusp of signing a landmark defense treaty, according to the Journal.
There are two things that I want to emphasize here.
First, since the defense treaty is about to be signed, any comments from Saudi Arabia might be viewed as simply a part of the negotiations.
Second, a false rumor like that would be likely to trigger sales by those who don’t know that it’s fake, allowing those that do know it to take the opposite (long) positions in the USD Index at more favorable prices, before the next rally begins.
That’s what seems most likely from the technical point of view. Remember, technical indications that we see on the charts lead fundamental developments.
The USD Index is after a medium-term breakout and its verification.
Additionally, it’s after a short-term breakout and its verification.
The door is wide open for further gains, which perfectly corresponds to what we saw in copper, gold, and bitcoin, but I already wrote about it yesterday.
On a short-term basis, we see that gold continues to consolidate below its 50-day moving average.
It just touched it, and then it moved back down. But I already wrote about it in yesterday’s premium Alert. What I want to add today is that gold is trading right after the triangle-vertex-based reversal point when looking at the chart based on daily candlesticks. This suggests that the turnaround could take place as early as today or tomorrow.
On the other hand, when looking at the same price moves but using 4-hour candlesticks, we get a slightly different reading. Namely, that gold’s reversal would be due early next week. Either option seems probable, just as the USD Index could soar right away or in a few days.
Meanwhile, silver is outperforming gold on an immediate-term basis, and since silver is known to catch-up with gold in the final parts of an upswing, it seems that the above-mentioned scenario, in which gold decline soon is very realistic.
I wrote in my premium analyses that the situation in the GDXJ is similar to what we saw at the 2022 top, but we see that also in the case of gold, when looking at its monthly charts.
We saw two powerful monthly reversals that were then followed by one month where gold declined just a bit. Gold is currently pretty much flat on a monthly basis, which is in tune with what happened in early 2022.
So, yes, while gold is likely to soar in the following years (and if you’re looking for reputable gold dealers to add to your insurance capital, look no more), the short- and long-term indications align and point to lower prices for the precious metals sector.
Based on the information that we have right now, it seems that gold, silver, and miners are likely to form a short-term top within the next few days. As always, I’ll keep my subscribers informed.
Thank you for reading today's free analysis. If you'd like to get my analysis in its premium version, I encourage you to subscribe to my Gold Trading Alerts that feature all key trading details for the current opportunity. And if you're not yet on our free gold mailing list, I encourage you to sign up today.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief