The big driver impacting the precious metals market this past week has been the US dollar. We have been watching this converging wedge formation in the dollar index. It is a measure of the US dollar versus a basket of foreign currencies, for several months. Additionally, this past week the formation broke higher in favor of the dollar.
See the red highlight circle in the chart below:
As we know, over the short run gold tends to move inversely to the US dollar.
Interestingly, gold had broken below its $1,305 consolidation support a week before the dollar broke higher from the pattern above. Gold, essentially, anticipated the strengthening of the US dollar before it occurs.
We can see the inverse correlation between the dollar and gold on the chart below clearly over the last three weeks.
Now since October 6, gold has been giving the opposite signal to the preemptive drop from late September. Fundamentally, gold has moved sideways in consolidation since that date. Meanwhile, the dollar has continued to rise.
What gold is saying over the last few weeks is that it doesn’t “believe” the dollar’s most recent advance is going to last.
Watching for a Top in the US Dollar Index
Refer back to the US dollar index chart at the top of the article.
Again, the dollar has broken higher from the wedge consolidation. Defined by the two converging trendlines since May of this year. Closing at 98 on the dollar index last week, it has been the 3 point move higher. This move from 95 to 98 has resulted in gold’s drop from $1,315 to $1,250.
The dollar is now nearing another test of the 100 level on the index– a measure that has acted as resistance for the last two years.
We will be watching the action in the US dollar index carefully over the next few weeks. Should the dollar further levitate toward the 100 resistance zone, while gold continues to hold its recent lows, will it be a strong signal that the dollar is putting in a long-term top in this region? Accordingly, the most recent decline in gold will be seen to be merely the first minor correction in the early phases of a long-term secular advance higher — a breakthrough that ultimately should correspond with a worldwide awakening — knowledge in that all currencies — not just the US dollar — are inherently flawed in their present fiat form.
That said, and as we have witnessed, we should expect the most sizeable moves in gold to occur opposite the US dollar. A weakening in the world’s reserve currency will have an outsized impact on the entire world financial system in the post-Bretton Woods era.
Let us watch the related moves in the dollar index and gold firmly over the next several weeks.
For the week, gold was up $3 from the Friday before close near $1,255 on the New York COMEX exchange.
The historic store of wealth is attempting to stabilize in the active support zone we have identified below in green. Notably, thus far despite several intraday drops into the area, buyers have stepped in each time. Additionally, the precious metals market has closed each day above the 61.8% Fibonacci retracement level of the entire December through July advance. This level comes in at $1,251.
If gold can stabilize at a higher level of $1,200 – $1,251 it is likely that the long-term downtrend line (magenta color) will break on the next series of attempts. So, early estimates suggest this could occur as early as December.
As technical-based analysts also looking at downside potential, we continue to identify the $1,173 price level as the final “must hold” zone for gold’s new bull market. If this level were to breach, it would tell us that — despite the fundamentals that we know to be true (global central bank money printing, unprecedented low-interest rates, unsustainable debt levels). Another fundamental factor must then be impacting the markets that we don’t know.
One of the founding principles of our investment philosophy is we cannot possibly know every factor that is impacting a set market at a given time. Moreover, this is because the market is composed of hundreds of millions of individuals, each with their own set of hopes, fears, strengths, weaknesses, assumptions, research, and goals.
Yet to be successful, we do not need to know what each is thinking. By paying attention to the sum of the market — which manifests in the price that prints each day — we can align ourselves with the most influential trend as it is occurring.
We have no desire to be right on the fundamentals but wrong on the actual market. Yet, a problem that plagues many fundamental-only-based investors. As of now, it still appears that the December bottom was an essential long-term flexion point. If anything changes this outlook, we will be sharing it with you here.
Bullion Exchanges Market Analyst
Christopher Aaron has been trading in the commodity and financial markets since the early 2000s. He began his career as an intelligence analyst for the Central Intelligence Agency. This is where he specialized in the creation and interpretation of the pattern of- life mapping in Afghanistan and Iraq.
Technical analysis shares many similarities with mapping: both base on the observations of repeating and embedded patterns in human nature.
His strategy of blending behavioral and technical analysis has helped him and his clients to identify both long-term market cycles and short-term opportunities for profit.
This article is a third-party analysis. It does not necessarily match the views of Bullion Exchanges. Readers should not consider this as financial advice in any way.