Gold vs. USD: Who will blink first?

 

Todays chart compares gold and the USD. The black line is gold, and the USD is red. Upon a quick glance of the chart, you can easily see that most of the time, gold and the greenback move in opposite directions. That tendency makes gold a hedge against a falling dollar. On occasion, the two move in tandem. That doesn’t last too long. Such periods are likely leading into an aggressive about-face for the direction of the two charts.

The bottom pane of our main chart is a correlation study. Basically, a correlation line shows us how correlated the movement of these two charts are in movement. You’ll note that for the vast majority of time, the correlation line is below “zero”. When its below zero, its a negative correlation. That makes sense. When the dollar zigs, gold zags most of the time. You will see brief moments where the correlation line moved over the zero line. The closer to 1.0, the more closely the two are moving in tandem with each other. These periods, as I said, dont last long – as illustrated by the brief hooks above zero before reversing.

The longest lasting positive correlation between gold and the dollar can be seen on the left side of the chart in 2010. The two moved in tandem for several months. Take a look at the right side of the chart. Note how the current period is showing the highest positive correlation between gold and the USD since 2010. They’ve both been bullish for many months. History suggests that this wont last long. Either the USD , or the price of gold will move out of sync with the other. The correlation line doesn’t stay above zero for any meaningful period of time.

Lets look at the charts of gold and the USD to see which will give (go down).

 

USD

Here’s the weekly chart of the USD. You can see that its been in a pretty tight bullish trend channel since 2018, and a general uptrend since 2017. It recently hit the top of the channel. Will it pull back to the lower part of the channel? Probably! That’s about 96.50 to 97. Its already sunk from 99.50. So we’re half way there. To me, that’s not a ton of downside – so long as the trend chanel remain.

Gold

Here is the weekly gold chart. In this chart, I added the momentum studies to point out the rounding over from overbought levels. Downside is to the black horizontal line which represents the breakout point. Like the USD – its a pullback within a bullish pattern. Downside for gold is probably to near $1400. I’d be a buyer around there. If it holds.

 

 

Conclusion

Our top chart suggests that the positive correlation between gold and the USD that occured in  recent months should come to an end very soon. At this time they are still rather correlated. Now both are moving down from overbought levels. So long as they move in the same direction, be it up or down, they remain positively correlated. And that, as you know from the top correlation chart, won’t likely last.

My question remains: which will give? Will the USD break its uptrend and start a bear trend? Will gold hit $1400, and fail at that level of support (former resistance)? I honestly cannot provide guidance here. For now, the best thing to do is watch them both and see who blinks first. IF gold bounces positively off of $1400 (ish), its likely best to buy gold, sell USD’s. IF the USD bounces off of the bottom of its trend channel at or around $98 – its probably best to hold USD’s, sell your gold. Your guess is as good as mine as to which will occur. My only conviction is that somebody’s gonna blink.

8 Comments

    • Yes I do–this is why a pullback to the neckline, which is a typical occurrence in that formation, may occur. Thats near $1400 (+ or minus $20). Such a pullback is likely a good place to leg back in. For now, we are out of precious metals. But the bigger picture is probably bullish, so long as the neckline holds.

      Reply
  • Hi Keith,
    In reading your analysis about gold and the US $ I am wondering whether you have also partly answered the query you made in your previous blog about the TSX. In that blog you were quite doubtful about the possibility of a new bull market in the TSX, feeling that the recent bounce had been created by an exogenous event in the middle east energy complex. However, if there is to be a trend of sustained weakness in the US$ this would be bullish not only for gold but materials and other commodities since these are priced in US$. In other words, if the US $ corrects for a relatively long period, might this be the catalyst that’s needed to push several of the lagging TSX sectors higher? Given (as you indicated) the already generally stronger financial sector, a spark in several lagging sectors might push the TSX on to new all time highs in the upcoming seasonally strong period for stocks. What do you think?
    As always thanks for your work on this very useful and interesting blog.
    Joe

    Reply
    • I do think the energy sector is massively oversold. It could bound easily–but the bigger picture, beyond a bounce, is that we unfortunately once again have a government who is very vocal opponent of the energy sector in Canada. Its not just about energy. Its about CANADIAN energy. And our energy sector has no friends in the Liberal government–nor amongst the other left wing parties. It will be highly likely that anti-pipeline and anti-energy producer bills will pass, given that even a minority government can count on enough votes from the NDP and Green party to push those types of bills through.

      Reply
  • What are your thoughts on the energy sector? A lot will hinge on today’s election. Another 4 years of JT will be a disaster for energy for sure.

    Reply
    • I was away for a few days and couldn’t answer posts, but now you have your answer.

      Reply
  • Thank Keith for a great posting.
    It is too bad that the pipelines will not be build due to the left wing parties holding more seats in the House of Commons. What the vast majority of people do not understand the earth has been in a period of ‘deglaciation’ for hundreds of thousands of years, and the earth will continue this trend naturally, regardless of human intervention. Deglaciation is the melting of the polar ice caps and warmer temperatures, which is occurring naturally, too bad the granola crunchers do not get it.
    The more left Canada continues to lean, the more bleak our financial future will be. How can a the Liberal government get voted in again, when the outright state they will be running budget deficeits for the next four years. Something tells, me many Canadians are naive, and do not know what fiscal responsibilty means, too many short term thinkers.

    Reply
    • Ray–it is true re the level of ignorance. That, and the fact that there are plenty of special interest groups on the take from the liberals. Eg–I know for a fact that it is openly discussed in the public education system (teachers, admin, etc) to vote liberal–employees are openly recommended to vote liberal. Further, and worse, my kids – who have gone through high school and college programs- have told me that they are regularly being “taught” why conservative politics are effectively evil–this from a system that should be about unbiased education. There is a huge level of brainwashing going on out there–from the press who received bailouts, to the educators, and other special interest groups–the commonality being they are all getting something ($) that they don’t want to give up.

      Did you see the open endorsement from the Toronto Star – the biggest recipient of the taxpayer funded bailout money—pre election encouraging their readers to vote Liberal? OUr tax dollars hard at work.
      https://www.thestar.com/opinion/editorials/2019/10/16/liberals-are-the-best-choice-for-canada.html

      Reply

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