Anyone trading gold in the US is probably aware of the inverse relationship between gold prices and the US Dollar. The fundamental relationship goes like this: For changes in the value of the Dollar, when the Dollar goes up gold goes down, and vice versa. Lately the Dollar has been on a bit of a run compared to its peers. This 3-month chart of UUP, an ETF which tracks the Dollar with respect to a portfolio of other currencies, shows how the Dollar has run up since it’s local bottom in February.
As we all know, a short-term run does not a trend make. There’s been a lot of talk recently about Fed tightening, interest rate increases, and national debt. How has this affected the Dollar? To understand this we need a view of the bigger picture, like a 5-year chart.
RSI and MACD indicators are shown as these are commonly used to tell when markets are overbought, oversold, or might be near tops and bottoms.
What these two charts show is that the Dollar’s recent rise is steep, but not any steeper than it’s done in the past. And, while the Dollar is at a relative peak, it is far below the levels reached in 2015 and 2016. At the time those peaks were seen as extreme – money was flowing into the US chasing the equity market rises, and other economic areas such as the Eurozone were working through problems of their own.
To this Gold Enthusiast’s eyes, what this chart says is that the Dollar has recovered above a middle ground. 24 on this chart looks like a classic technical level – below that number it acts as resistance, above that it acts as support. The RSI and MACD indicate the Dollar might be overbought here, so a cooling-off period would be normal behavior.
Looking at times when the indicators said similar things after rapid run-ups – such as late January 2015 or October 2016 – the Dollar took just a short breather before heading even higher.
Currencies trade in relation to other currencies, it’s never one factor that drives a currency market for very long. The combination of factors and their importance is always mixing and changing. That’s why most predictions are wrong – they’d need to get a large number of factors right, and the more factors the greater the chance of error.
So while this Gold Enthusiast won’t go out on any long-term limbs, he is content to say the Dollar taking a break here would be expected behavior. From the fundamental relationship between the Dollar and gold, that would mean we could see higher gold prices in the short term. After that, it’s all a crap shoot.
Signed, The Gold Enthusiast
DISCLAIMER: The author has no positions in any mentioned security. He is long NUGT and JNUG, and may trade some or all of these positions in the next 48 hours.