The US Dollar and gold correlation continue positively. We were monitoring last week between the US dollar, and the gold price. They have become even more pronounced since the last update.
The US dollar, as measured by the Dollar Index, has continued to rise toward medium-term resistance on the charts. (near the 100 level). Meanwhile, gold is refusing to break down below its recent low of $1,243. (set on October 7).
These periods in which both the US dollar and gold move in the same direction are rare. However, they are not unheard of altogether.
They tend to happen during one of two main scenarios:
1) Market panics — when both assets are viewed as safe-havens and rise simultaneously. (or after the fear ends, when both fall simultaneously).
2) At major inflection points — when one market is advancing. Yet, the other market does not “believe” the legitimacy of the different market’s move.
We see no panic in the stock or currency markets recently. So, it appears that as of today, it is gold which is not believing the US dollar’s continued advance.
The update below continues from our chart last week. It shows both gold and the US dollar. This is since the recent gold low of $1,243 on October 7. (UUP is the proxy ETF for the US dollar index, GLD the proxy for gold).
We see an absence of a market panic. This simultaneous movement by both gold and the US dollar in the same direction will not last forever.
One of these markets will soon be proven “wrong.”
Should the dollar continue to advance toward the 100 level while gold remains firm, the precious metal will be signaling? It will show that the dollar is due to put in its final medium-term top of the nearly 2-year consolidation shown below. This is before the next reversal should take it below 92 into 2017:
However, should the dollar advance above 100 in a meaningful way, we would need to monitor the action in gold closely. It might represent a significant headwind for the precious metals market. Well, for at least the next year.
As of present gold continues to show little respect for the dollar’s advance.
Note on the chart above. The RSI indicator (top section) is approaching the overbought level above 70. This has marked previous tops in the dollar to within a few weeks through 2015.
The dollar is approaching significant long-term resistance. We will continue to show the dollar/gold relationship on a regular basis over the coming months. Especially with the possibility of a Fed interest rate hike before the New Year. And, with the US election only two weeks away. We see the primary currency markets prime for trend-setting action through December.
As of the New York COMEX close on Friday afternoon, gold had gained $12.20 for the week. (or nearly 1%). This is to close at $1,267.70.
Initial resistance will be showing up in the former support zone which broke during the early October decline. It broke between $1,285 and $1,305. With a high probability, we expect buyers will need at least two attempts to break through this resistance level.
For support, we are looking for gold to continue stabilizing above or within the zone of $1,200 – $1,251. This shows below in the green band. Let’s say gold can maintain the recent October 7 low of $1,243 as the bottom for this correction. It will then be set up a bullish posture to overcome the declining long-term downtrend. (magenta color). This is as early as December, and at the latest by March.
We continue to believe the overcoming of this long-term downtrend will represent a major shifting point in the psychology of the precious metals market. It should precede a significant dollar-negative event by 6-12 months.
We note that the RSI indicator (top of the chart) oversells since just before the December 2015 bottom. In a bull market, RSI readings below 30 generally signify medium-term bottoms. Although, this does not preclude the possibility of further time needed within the support zone over the coming months.
The US election is just over two weeks away. So, during the next two weeks, we will increase commentary on how the election results may impact the markets. Finally, most notably the US stock market, and of course the precious metals.
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. They 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 third-party analysis. It does not necessarily match views of Bullion Exchanges. Readers should not consider it as financial advice in any way.