Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Chart Of The Day: Investors Return To Healthy Dollar-Gold Correlation

Published 2019-08-01, 10:53 a/m
Updated 2023-07-09, 06:31 a/m

After strengthening in tandem with the U.S. dollar over the past few months, gold is now sinking — a sign it may be reverting to its customary inverse relationship with the greenback.

While the Fed yesterday announced the first interest rate cut since the bubble preceding the 2008 financial crisis, Chair Jerome Powell sent a hawkish message to dampen expectation of further easing. Stating “the labor market remains strong and economic activity has been rising at a moderate rate" the Fed was clearly signalling to the market it should not overprice additional cuts.

We expected the dollar to strengthen, even after a rate cut. But we also expected gold to rise as all-time highs established over-valuations amid multiple geopolitical risks and a global slowdown.

In addition, a negative yield environment would usually increase demand overseas for gold’s store of value. Finally, trading had developed a potentially bullish pattern.

This, however, has blown out. The yellow metal now appears set to return to its negative divergence to the yielding-dollar by which it is priced.

XAU Daily Chart

XAU Daily Chart

Gold has been trading within an ascending triangle, considered a bullish pause within the uptrend. The rising bottom against a flat top demonstrates buyers’ over-eagerness vs sellers, suggesting their commitment to the preceding uptrend. An upside breakout would have completed the pattern, after buyers absorbed all the supply available within the pattern and upped their bids to find a fresh batch of willing sellers.

Instead, however, the price fell below the lower boundary of the pattern, as the sudden outlook shift on rates reversed buyers into sellers, blowing out the pattern. Such a pattern failure tends to increase in momentum as buyers find themselves on the wrong side of the market and sellers curse themselves for not having been more proactive in what they already believed in. This presumed dynamic may turn into a free fall once speculators recognize a shorting opportunity, kicking the yellow metal when its down.

Both the lagging MACD and leading RSI have been triggering negative divergences, as they both flopped ahead of the pattern blowout.

Phillip Streible, senior market analyst at RJO Futures, says that gold has historically advanced in August in 13 of the last 15 years. The supply and demand dynamics suggest this August will go against those statistics, changing the read to 13 out of 16 years.

Trading Strategies

Conservative traders would stay out of this trade, as the trend is still up.

Moderate traders may short gold after it falls below the June 1, $1,381.91 low, followed by evidence of resistance.

Aggressive traders may short, after determining a balanced trade plan that fits their budget. Since we expect volatility, we picked a trade sample entry that would include a pullback, limiting exposure.

Trade Sample

  • Entry: $1,415
  • Stop-Loss: $1,425 – triangle bottom
  • Risk: $10
  • Target (NYSE:TGT): $1,385 – above triangle’s lowest point posted July 1
  • Reward: $30
  • Risk-Reward Ratio: 1:3
  • Latest comments

    good analysis but LOL gold 1440 now, thank you President Trump
    Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
    Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
    Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
    It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
    Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
    © 2007-2024 - Fusion Media Limited. All Rights Reserved.