In this post, I want to discuss the price of silver and a little known statistic called the dollar smile theory. This is important information for any silver stacker, in my opinion.
So first off, It’s key here to understand the US dollar index and that silver and gold prices move inversely with one another. For example , as the dollar index weakens , on average , we can expect silver and gold prices to increase. The dollar index is the US dollar compared to a basket of six currencies, including the Euro, Pound, Yen, Canadian Dollar, Swedish Korner, and Swiss Franc. And I ll talk about weaknesses of this a bit later, but lets get to the dollar smile theory.
The dollar smile Theory states the US dollar typically rises when either global economic growth is contracting or when the US is doing so well that it leaves other countries in the dust. Oversimplified , its about relativity, how we are doing compared to other countries. And proponents of this can find examples supporting this theory. For example, in 2008 the dollar soared because the US was doing better than its peers, even though Ironically the financial crisis started here. So, again, we are being compared against our peers, and a selected group of our peers not everybody in the world.
Now what does this have to do with gold and silver prices? Simply stated , the dollar index ,which is a huge factor of precious metal prices, is based on relative strength, and based on strength compared to a selected group of countries
I believe in the long term the dollar smile theory will breakdown though. See its really all based on relativity. Everything is relative, the US economy can tank but the dollar can still appreciate because the rest of the world is tanking worse. But this assumes the rest of the world is relying on us. As we see more of the world de-dollarizing and as we see less reliance on the US dollar, this theory won’t be able to hold up. And hence , the dollar will weaken and silver and gold prices will shoot up .
The bigger question is where will prices head next? I believe silver price will remain flat in the short term since rate cuts, in my opinion, won’t happen in the first half of 2024. Many think otherwise though.
Perhaps though the bigger question is when will the dollar smile theory break? This is whenever enough countries de-dollarize that we feel it in the US.
Now before I conclude I also want to talk about the obvious weaknesses in the U.S. dollar index. The dollar index is a comparison against a select group of countries , with the Euro heavily weighted in it , over 50%. There’s no China , India, Brazil, even though we know China is the largest exporter in the world. And most people are aware of it. One other factor is that it doesn’t account for inflation. So, again we have a flawed statistic determining precious metal prices, or indirectly I should say as futures traders move contracts based on this info.
