Gold, the Dollar and a big hole in the desert

Summary

  • Stocks rallied on news of a ceasefire between Iran and Israel
  • But celebrations may be premature
  • The dollar weakened, which is likely to boost demand for gold

The S&P 500 rallied to test resistance at 6100. Breakout would signal a fresh advance, but declining Trend Index peaks warn of selling pressure.

S&P 500

Uncertainty remains high.

The White House was quick to claim victory after the US airstrike on Iranian nuclear enrichment facilities. But claims that the subsequent ceasefire is the start of a new era of peace in the Middle East will likely prove premature.

A ceasefire is not a peace settlement. It’s a pause in hostilities that allows both parties to rearm and re-strategize.

A precision strike is nothing more than a big hole in the desert, the effectiveness of which can only be determined by subsequent Iranian actions.

The damage assessment reported by CNN is premature, but it does raise some interesting questions.

The assessment, which has not been previously reported, was produced by the Defense Intelligence Agency, the Pentagon’s intelligence arm. It is based on a battle damage assessment conducted by US Central Command in the aftermath of the US strikes, one of the sources said.

The analysis of the damage to the sites and the impact of the strikes on Iran’s nuclear ambitions is ongoing, and could change as more intelligence becomes available.

….Two of the people familiar with the assessment said Iran’s stockpile of enriched uranium was not destroyed. One of the people said the centrifuges are largely “intact.” Another source said that the intelligence assessed enriched uranium was moved out of the sites prior to the US strikes. (CNN)

If the stockpile of enriched uranium were moved or otherwise not destroyed, how would this affect Israel’s security?

The only way to finish this is with boots on the ground. Neither Israel nor President Trump is likely to commit to that.

In the Treasury market, 10-year yields declined to 4.3%, easing the pressure on stocks.

10-Year Treasury Yield

However, the dollar continues to weaken, with the US Dollar Index testing support at 98. A breach would confirm our target of 90.

Dollar Index

The chart below shows how Brent crude and the dollar moved contra-cyclically, with the dollar weakening when crude oil prices rose, and vice versa.

However, that changed shortly before Russia’s full-scale invasion of Ukraine in 2022, the dollar strengthened despite a spike in energy prices, diverging from past behavior as investors sought safety. The divergence continues, with the dollar weakening while crude oil prices are falling. The dollar’s role is under threat.

Brent Crude & USD Index for Advanced Economies

Investors globally appear to be gradually reducing their exposure to dollar-denominated assets, driving the greenback down to its lowest level against a basket of major currencies in three and a half years….

According to Bank of America’s FX strategy team, European “real money” investors – institutions like pension funds and insurance companies – are the main drivers of the dollar’s selloff in the second quarter, slashing their dollar positioning to the lowest since 2022 in a matter of weeks.

But the story might not be so straightforward…. research shows that most of the dollar’s average daily declines in the last few months have come in Asian trading hours, suggesting Asian holders of U.S. bonds may also be increasing their dollar hedges. (Reuters)

Demand for gold remains strong as the dollar weakens, with the metal finding support at $3,300 per ounce. Respect of this level would signal another test of resistance at $3,400.

Spot Gold

Conclusion

Stocks have rallied, but uncertainty in the Middle East remains high.

Long-term Treasury yields have softened, but the dollar continues to weaken, reflecting uncertainty over the US role in the global monetary system.

Private investors have replaced central banks as major investors in US Treasuries. They are far more price sensitive, and both European and Asian investors are increasingly hedging their dollar positions, expecting dollar weakness.

A weakening dollar is expected to boost demand for gold.

Acknowledgments

4 Replies to “Gold, the Dollar and a big hole in the desert”

  1. I would not consider CNN reports, about anything related to Trump, as credible.
    Israeli agents, on location, have confirmed complete destruction of FORDOW.

  2. Director John Ratcliffe said in a statement: “CIA can confirm that a body of credible intelligence indicates Iran’s Nuclear Program has been severely damaged by the recent, targeted strikes. This includes new intelligence from a historically reliable and accurate source/method that several key Iranian nuclear facilities were destroyed and would have to be rebuilt over the course of years.
    https://www.theaustralian.com.au/world/live-updates-donald-trump-says-iran-strike-leak-unfair-to-pilots-as-fbi-launches-probe/live-coverage/fe19d9fed0d20fbb5d48ddf95f7a14f3

    1. Hi Steve,
      I hope that Iran’s nuclear program is set back, but there appears to be conflicting assessments coming out of the intelligence community.
      Also, has the stockpile of enriched uranium been destroyed or was it moved in anticipation of airstrikes?

      We live with uncertainty.

      1. Hi Steve,

        Here is an assessment from former IAEA Deputy Director General Olli Heinonen:

        Iran’s Foreign Minister, Araghchi, posted on X Friday:

        “The Parliament of Iran has voted for a halt to collaboration with the IAEA until the safety and security of our nuclear activities can be guaranteed.”

        Araghchi’s statement signals a hardening stance in Tehran just as international inspectors are racing to verify the fate of Iran’s enriched uranium.

        For Heinonen, the message is clear: transparency is now the only path to de-escalation.

        “This is the truth-telling test,” he warned. “Because there’s no reason to resist. If this is a civilian program, why restrict the IAEA’s work?”

        Until Iran proves otherwise, the world must treat the threat as far from over.

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