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VIDEOUS Dollar to Fade as Gold Heads Higher
Recently the two have moved together, but chart patterns suggest the US dollar and gold will begin moving inversely to each other very soon.
One of the key technical signals I was looking for in anticipation of a new major rally in gold was a close above the 50-day moving average. Well, last week gold delivered that signal -- twice.
Whilst we still need to see a close above $1220 to confirm this move, I'm now very confident that a major rally in gold prices will begin in earnest in the next couple of weeks.
Last week I was expecting a rebound in the US Dollar from oversold conditions. Sure enough, the rebound in the USD did eventuate, with the index rising from 80 to almost 83 in a matter of days.
However, I had thought that this rebound in the US dollar would cause gold prices to fall slightly, but this didn't happen; instead we saw gold prices increasing with the USD.
This recent positive correlation between the USD and gold has caught my attention because, over the past few years, the two have tended to be negatively correlated, with gold moving inversely to the USD with some leverage factor.
By simply putting together some charts of gold versus the US dollar over the course of this gold bull market, it's become clear that although the relationship is largely inverse, there are periods where the two move together.
I don't claim to be a specialist in the field of market cycles, however it appears that after roughly four years of moving inversely, gold and the USD then began to move together for roughly seven months, before moving inversely again for another four years. They've now been moving together for about eight months; so if the pattern described above were to continue, one would expect the US dollar and gold to begin moving inversely to each other very soon, and for this negative relationship to continue for four or so years to come.
Since my firm is bearish on the USD and bullish on gold over the next few years, this general cyclical analysis fits with our current outlook. In conclusion, although the inverse relationship between gold and the USD doesn't always hold, this hasn't affected my firm's gold price forecasts. We think gold will make a new all-time high before the end of the year, and probably challenge $1300.
(In US Dollar Indexes, PowerShares DB US Dollar Index Bullish (UUP) last traded at 24.11, while PowerShares DB US Dollar Index Bearish (UDN) last traded at 25.72. SPDR Gold Shares (GLD) is trading up in pre-market, +1.16 to 119.90.)
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