BullMarketRun.ca

From time to time at BMR we like to examine the performance of the U.S. Dollar and how it’s acting in relation to Gold.  In February of this year we pointed out a very important trend change as Gold started to rise in tandem with the U.S. Dollar – this signaled new strength in the Gold market which allowed us to make some accurate calls.  Just recently, a more normal inverse relationship between the two has resurfaced as the U.S. Dollar weakened considerably while Gold has continued to strengthen, hitting new highs.  From a fundamental standpoint, our macro view is that we’re in a period of general currency debasement and Gold is becoming an alternative currency.  The yellow metal is underpinned by many factors, not the least of which is the fact the Fed is likely to engage in more QE (Quantitative Easing) measures this fall in order to jump-start the American economy.  That’s likely to put additional pressure on the U.S. Dollar, hence the outlook for Gold remains very bullish.

The U.S. Dollar bounced back slightly today and Gold correspondingly cooled off, again demonstrating the return of the inverse Dollar-Gold relationship.  BMR’s technical analyst sees little hope for the U.S. Dollar getting above 80 on the Index, and what would happen if the Dollar were to fall below the long-term support around 76 that John has outlined below?

John: We are using a U.S. Dollar Index-Gold comparative chart where the Dollar is the focus and thus presented in candle format while Gold is shown as a single black line. The Dollar Index is a method of determining a relative value for the U.S. Dollar in terms of a weighted basket of other currencies – the Euro, Canadian Dollar, Japanese Yen, Swedish Krona, British Pound and the Swiss Franc.

At the beginning of December, 2009, the U.S. Dollar started to climb from a low of 74 and during the next seven months climbed to a high of 88. At that point it ran into resistance from two previous peaks in November, 2008, and March, 2009, and began to decline to a support level at 80.  Then it rebounded up to the 83 level in August of this year where it met resistance and began its decline to a support level of 78.  Today we saw a bounce up from that support.

I have drawn the 78 level support as a horizontal green line with violet circles indicating consolidation/resistance/support instances which have created this support level.  In addition I have also drawn a long term support (green sloping line) as noted on the chart. These support levels must be kept in mind during future U.S. Dollar moves.

Looking at the U.S. Dollar indicators:

The Slow Stochastics has the %K (black line) low at 3% and below the %D (red line) which is at 9%, thus both are in the oversold zone and in addition have almost completed a bullish “W” formation.

The ADX trend indicator has the -DI (red line) at 33 and appears to have peaked with the +DI (green line) below at 16 and perhaps ready to reverse upward.  The ADX trend strength indicator (black line) at 24 shows that the underlying downtrend is only of medium strength at the moment.

Outlook for the U.S. Dollar: Today the Dollar bounced up off the support and the Slow Stochastics shows that a reversal can be expected in the very near future.  However, I expect the bounce up will go no further than the resistance as shown on the chart at the 80 level.  

Outlook for Gold: Gold should continue to vary inversely with the U.S. Dollar and in the days ahead we could also see some consolidation in the yellow metal.  This is not a bad thing for Gold at this time as it is overbought after a rather long run-up.  Any consolidation or softness in Gold, however, is expected to be minor and short-lived with the U.S. Dollar’s upside limited.  Note that consolidations are necessary from time to time to keep uptrends sustainable.  It will not be long before Gold is charging up to new highs.