August 24, 2009

Dollar Index versus Gold Futures

The daily bar chart above demonstrates the inverse relationship between the US Dollar Index and Gold. Plotted on top in black bars are US Dollar Index futures; Gold futures are plotted on bottom in orange bars. Blue vertical lines mark specific points of interest.

It's said that when the Dollar goes up, Gold goes down - and vice versa. But this relationship can, in the short term, decouple. Note that in the last two episodes when Gold compressed in a triangle like fashion (first on this chart in 2003, and again in 2006) that the Dollar biases downward during Gold consolidation.

In both instances, when Gold finally broke higher, the Dollar accelerated its slide against world currencies. Note now that Gold is once again consolidating heavily below $1,000 per ounce, and is poised to breakout somewhere around $950. Indeed, the Dollar is currently trading near critical support at $78, and its direction should be clearer in the days ahead.

No matter whether Gold goes higher as many predict, or lower for which a case can be made, the inverse relationship to the Dollar can be expected to hold. The last breakdown in the US Dollar occurred at a similar juncture around a critical support level, all while Gold prices were compressing. The subsequent breakout in Gold took the Dollar even lower below then critical support. Technicians should therefore continue to take cues regarding the US Dollar from the next breakout in Gold.

Jeffery E. Lay, CMT
President
Talon Eight, LLC

Disclaimer: This post is intended solely to disseminate information, and is not, and shall not be construed to constitute financial, investment or other similar advice. All posted material should be independently verified for accuracy and current applicability. Readers of this post are referred to the Risk Disclosure for further information.

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