John: Two of the main news items we see and hear about every day are the price of Gold and the value of the U.S. Dollar. Tonight we will investigate the relationship between the two, purely from a technical analysis perspective as we bypass the complex rhetoric about the causes and effects of government economic policies on each. A chart and indicators are worth a thousand pages of descriptive commentary.
Let us start with a look at the 6-month daily comparative chart of Gold (continuous contract) and the U.S. Dollar Index. The Dollar Index, by the way, is a weighted geometric mean of the value of the U.S. Dollar relative to a basket of six foreign currencies. On this chart the Dollar Index is the focus in candle format with the price of Gold shown as a single black line.
We often hear that the price of Gold and the U.S. Dollar always have an inverse relationship (one goes up while the other goes down). But looking at the chart we see that between the two vertical thin blue lines Gold and the U.S. Dollar have moved in tandem, so the inverse relationship is not always true.
Then on August 25, rather abruptly, we see the beginning of a divergence as shown by the dotted blue lines. I have drawn two vertical green lines to show how accurately the Slow Stochastics can identify the Dollar Index’s tops and bottoms. We can also see that between August 12 and September 13, a small head and shoulders pattern formed. This pattern was confirmed September 13 when the Dollar Index broke down through the neckline (green line) and then today when it broke down through the measured target level around 80.5. This shows that the U.S. Dollar is displaying weakness and is expected to drop further in value as it has broken below the strong support level (horizontal green line). Gold, on the other hand, continues its march to higher levels in an almost linear fashion.
Looking at the indicators:
U.S. Dollar (indicators shown on chart)
The RSI is just entering the oversold region and is at the 28% level – has room to fall further.
The Slow Stochastics shows the %K (black line) is down in the oversold region at the 13% level but pointing down, and the %D (red line) is higher at 30% and also pointing down. This shows that the U.S. Dollar can fall further in value.
By comparison the indicator values for Gold (indicators not shown on the chart) are as follows:
The RSI is in the overbought area at 77% – still has room to move higher.
The Slow Stochastics has the %K high at 91% and pointing up but the %D is at 71% and pointing up. There is still room for Gold to move up.
Outlook: The chart and indicators show that Gold still has room to go higher before a pullback while the U.S. Dollar is likely to remain weak in the immediate future. It is increasingly clear, however, that they are overbought and oversold respectively and should be constantly monitored.
