We have long held the view that gold’s fortunes were inversely linked to the US Dollar, as the Dollar strengthened, gold weakened and so on. Today, we will take a quick look at that relationship to ascertain if that premise still holds true.
The Gold Chart
The following is a chart of gold’s progress spanning a period of 18 months which shows the value of gold rising from around the $1,200.00/Oz level to the $1,600.00/Oz. A couple of corrections have taken place along the way which always causes indigestion in the precious metals space as the well-known ‘Wall of Worry’ had to be climbed.
Last year ended well with gold rallying through December; however, at the start of this year, gold looked sluggish and seemed unable to gain any real traction. Although, it should be noted that over the last few days, gold has taken a peek above the $1,600.00/Oz level.
The US Dollar Chart
The following chart depicts the oscillations of the US Dollar over last 18 months where the ‘97’ level acted as both a resistance level and a support level. However, the Dollar has managed to rise from around the 95 level to today’s highs of 99 with a possible breach of the 100 level in the near term.
The technical indicators such as the STO, MACD and RSI are firmly in the overbought zone, suggesting that there might be a pullback in the near term. This of course is not a given as the other major currencies, such as the Euro have fallen dramatically of late, partly due to the UK’s exit from the European Union which renders the future of both parties uncertain.
The Gold/Dollar Comparison Chart
This chart clearly shows that gold is making good progress despite the US Dollar also doing very well. It suggests that the inverse relationship that previously existed between them may be decoupling.
Gold has had an inverse relationship with the US Dollar and tended to move in the opposite direction to the Dollar. However, we can see from the chart above that gold is moving to higher ground despite the strength of the Dollar
A lot depends on the central bankers and their application of monetary policy. The ‘normalization’ of interest rates as a target for the Federal Reserve is now history as a more accommodative stance has been taken with the implementation of rate cuts.
There are signs that the global economy is slowing down so we wouldn’t be surprised to see the US reduce rates to zero before this year ends.
We should also note that Denmark now has negative interest rates applied to mortgages. If negative rates become the norm and it costs money to hold currencies, then we would expect investors to reallocate their funds to some form of hard asset such as gold.
In conclusion, I believe that gold has decoupled from the US Dollar and is moving under its own steam where supply and demand will play a more important role in the pricing of gold.
Gold has a bright future so the acquisition of both the physical metal and their associated stocks will prove to be profitable for those who act now.
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