Gold To Profit From The Coming Dollar Correction

The strengh in the U.S. dollar has been putting a lot of pressure on the commodities complex. It is no coincidence that, since last summer when the dollar started a monstrous rally, the crude oil price collapsed by more than 50% while the commodities index CCI lost some 30% of its value.

The price of gold has not really suffered over the same period of time. The inverse correlation between gold and the dollar has not been that outspoken. The inverse correlation becomes even more meaningless when looking at gold in non-U.S. dollar currencies (euro, British pound, yen, etc).

The first chart shows the rally of the U.S. dollar in blue, starting in September 2014. The gold price, marked in yellow, shows a whipsaw pattern, but certainly not a crash. Since last summer, gold is slightly lower, but not meaningfully (certainly not in non-dollar currencies).



Although the inverse correlation between gold and the dollar is not outspoken, it is somehow intuitive that the dollar has not “allowed” a structural rally in gold. In other words, with a weaker dollar, there would have been a higher probability of higher gold prices.

That leaves us with the question how much strength to expect from the U.S. dollar. To answer that question, we looked at the very long term dollar chart, see next chart. From a technical point of view, we can detect three interesting insights. First, the steepness of the recent rise is quite unusual. In other words, there are no other instances in the last 30 years where the dollar has risen more than 25% in 9 months. Second, the dollar is severely overbought, as measured by the RSI momentum indicator. In fact, it has not been that overbought in the last 3 decades. As readers can see on the upper part of the chart, only in 1985 did the dollar show such a similar overbought condition. Since then, the dollar has only exceeded a handful of times the critical 70 reading. Third, and foremost, the dollar is entering an area of powerful resistance, at least from a chart perspective. We have indicated that area with the red rectangle. Moreover, the resistance area is close to the 100 level, and, as we know, round numbers are traditionally powerful in providing both resistance and support. There have been several (unsuccessful) attempts to break through that magical 100 area, going back to 1987, making that area even more important.



The key take-away is that the dollar can certainly go higher from here, but the rally is close to cool down. Also, no matter how impressive the recent rally has been, its strength has been historic, so it should not be realistic to expect a similar strength going forward. These factors make us think that the pressure on commodities, including the precious metals complex, is about to fade. One sidenote on that point: do not confuse inevitable with imminent, timing has always been the real challenge.




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