The US Dollar is not Driving the Market – Gold Is!

Everyone has heard about the weak dollar driving the equity markets and Gold higher.  I have written about both sectors myself back in September and August. I follow the relationship between Gold and the US Dollar and this week it has given me cause for concern as the US Dollar Index is trying to put in a bottom and Gold is rolling over.  But it is not the US dollar that is concerning me the most.

Look at the daily charts of Gold Futures and the US Dollar Index below.

These charts clearly show that Gold and the US Dollar Index have near mirror image patterns but with Gold shifted forward a couple of days, leading the way. This is the first part of the cause for my concern. That is because with Gold rolling over and starting a down trend this could mean that the US Dollar index is ready to rise.

Now look at the combination of the two charts, the US Dollar Index priced in Gold.

This chart shows textbook indications of a bearish trend from the beginning of September until last Thursday October 14th. The ratio has been tied to the bottom Bollinger band, until last Thursday, the Simple Moving Averages (SMA) are all declining, the Relative Strength Index (RSI) is pinned in the oversold position and the Moving Average Convergence Divergence (MACD) indicator was negative. But look what has happened since then. the trend is reversing.  The RSI is approaching 50, the MACD is now positive. But I want to focus on the Bollinger Bands. The price is now past the mid line of the Bollinger Bands as of today. This is not only a bullish indication but over the past 2 years, since this ratio has been falling, when this has happened to this ratio it has either continued to the upper band or near there all but a couple times in over 20 instances. If it were to move to that upper Bollinger Band it is likely that it happens with Gold continuing down to support of the Fibonacci level near 1300 and would imply a move in the US Dollar Index to near 80!

So Why Am I Concerned?

Now compare the chart of the US Dollar Index to that of the SPY over the same period

They have also moved in a mirror image, but with no offset. You can see the reversal in the US Dollar Index chart in early August corresponds to the reversal in the SPY at the same time. Also the low for the SPY at the end of August happens at the same time as the high of the US Dollar Index. Finally both are pausing now.

So if recent history repeats then falling Gold prices may indicate a rising US Dollar Index and falling Equity prices. If this happens and the US Dollar Index were to rise to 80 note that the SPY was trading at 112.70 when that last happened. That is why I am cautious.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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