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We've been here before, Fools, but each successive moment of truth for the U.S. dollar carries greater implications than the time before.
The U.S. dollar index, a broad measure of the greenback's value against foreign currencies, broke down below the 80-mark again Friday. When that level was last breached in December 2008 after a Fed rate-cut, precious metals like gold and silver surged in value … much as they have again recently. Gold has risen more than $100 from its April lows, while silver is set to post its largest monthly gain in 22 years. Oil, too, can find significant strength amid dollar weakness, and shares of foreign oil producers like CNOOC (NYSE: CEO ) and Petrobras (NYSE: PBR ) have surged accordingly.
For those who pay attention to the dollar, the long-awaited return of shares like Yamana Gold (NYSE: AUY ) or Silver Wheaton (NYSE: SLW ) to double-digit territory may come as no surprise. Silver Wheaton has now more than quadrupled from its 52-week low of $2.51, coinciding with a faltering USD rally and increasing concerns over the currency's longer-term outlook. With added strength from major gold producers like Newmont Mining (NYSE: NEM ) and Goldcorp (NYSE: GG ) , this Fool's silverminer CAPS portfolio has surged into the top 200 with 95% accuracy. Interestingly, it was precisely a counter-intuitive spike in the USDX that prompted the creation of that portfolio.
From a fundamental perspective, the dollar is key to understanding the precious metals market. Although short-term aberrations can occur, precious metals and the dollar exhibit an inverse correlation over the long term.
What's so important about the 80-mark on the USDX? Examining a very long-term chart, you'll find that the index flirted with that level several times since its inception in 1973 … without breaking lower. When such long-term support breaks down as it did last year (the USDX plummeted to below 71 in March 2008 before rallying to near 90 a year later), it's any Fool's guess where the next level of support awaits. If we spend any significant time here, then I suggest a re-test of that March 2008 low is inevitable. Based upon the fundamental picture, however, I believe it's inevitable anyway.
Since December 2008, when we last touched this level, the scale of the fiscal response to the financial crisis leapt from $8.6 trillion to more than $13 trillion, quantitative easing was unleashed, and foreign holders of dollar-denominated debt have grown increasingly concerned. Guided by fundamentals, this Fool remains defensively positioned against further dollar weakness.